Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., announced its second quarter earnings of R$10.9 billion or R$0.84 per share, compared with R$8.3 billion or R$0.95 per share in the year-earlier quarter. Per share profitability dropped after the company sold $70 billion of new stock in September last year.
Earnings per ADR came in at $1.07 (exchange rate: U.S.$1.00 = R$1.57, 1 ADR = 2 shares), ahead of the Zacks Consensus Estimate of $1.01. This was mainly on the back of improved crude prices amid strong domestic energy demand, aided by a strengthening currency, partially offset by rising costs and government caps on fuel prices that eroded refining margins.
Petrobras’ revenues of R$61.5 billion (or approximately $39.2 billion) were up 14.7% from the second quarter 2010 level and also beat our projection by 10.7%. The quarterly outperformance was fueled by the jump in crude prices that rose above $125 per barrel for the first time in over two years.
Operational Performance
Upstream: Total oil and gas production during the second quarter of 2011 was up marginally (by 0.4%) from the same period of 2010. The Brazilian group’s volume growth was slowed down by offshore platform maintenance. However, the company ramped up output at the Tupi field (discovered in 2006 and now renamed as Lula) – the largest oil discovery in Brazil's history – to 54,000 barrels per day of oil and natural gas in June.
Downstream: During the second quarter, Petrobras’ downstream unit incurred a net loss of R$2.3 billion, much wider than the year-ago loss of R$108 million. This was due to the company’s inability to shift the burden of rising oil costs to its consumers, as mandated by the state policy of keeping a lid on gasoline and diesel prices.
Capital Spending Plan
Petrobras has embarked on an ambitious investment program for the 2011-2015 period, totaling a massive $224.7 billion. It will require huge capital expenditures to develop the deep pre-salt layers as part of the company’s strategic initiative to ramp up production from the current 2.5 million barrels of oil equivalent per day (MMBOE/d) to 3.9 MMBOE/d in 2014 and 5.4 MMBOE/d in 2020.
The integrated major’s spending program includes $12.4 billion for the development of new oil reserves it bought from the government as part of its $70 billion share issue, the largest in history. The stock offering saw the Brazilian government receive shares worth about $42.5 billion against the transfer of rights for up to 5 billion barrels of deep-sea pre-salt oil reserves (oil deposits located in the sea bed under thick layers of salt) to Petrobras.
About the Company
Headquartered in Rio de Janeiro, Petrobras competes with other established integrated energy firms like ExxonMobil Corp. (XOM), PetroChina Co. Ltd. (PTR), Royal Dutch Shell plc (RDS.A), etc. The company’s activities include: exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
Petrobras ADRs currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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