Petrobras Anticipates Rapid Growth from Offshore Brazil Discoveries

We initiate a buy recommendation on the common or preferred shares of Petrobras (PBR) for participation in the development of one million barrels daily of new crude oil production in the deep waters offshore Brazil. The giant discoveries unfolding in the Pre-Salt Formation under miles-deep water contribute to a doubling of total company oil and gas production by 2020 by management’s estimate. The stock offers unlevered appreciation potential of 45% to a McDep Ratio of 1.0 and levered appreciation potential of 54% to Net Present Value (NPV) of $58 a share.

We count the unproven discoveries as 27% of estimated Net Present Value of $58 a share. Rapid oil volume growth is already underway with our projection of a 10% gain in 2009. At the same time, the technological challenges are daunting, the capital requirements formidable and the politics uncertain. Meanwhile, advancing oil price may reflect an improving economic outlook that also supports increased confidence in Brazilian oil. Futures prices for the next six years averaged almost $71 a barrel recently.

Originally published on May 5, 2009.

Comments

[Mad Hedge F...:]

Great call. I ran into a couple of geologists from the Brazilian oil company Petrobras (PBR) who knocked my socks off when they told me about the quality of the crude they were pulling out of their new deep offshore Tupi field. They are drilling at 20,000 feet and getting 15,000 barrels a day of hot, light sweet crude blasting back in their faces under its own pressure; the kind of premium crude you normally only find in the Middle East. Overall, the company plans to boost production from 2.4 million barrels/day today to 3.6 million in five years and 5.7 million in ten years, or half of Saudi Arabia’s current production. I was unable to pin them down on the true cost of the offshore production, meekly claiming they didn’t break the figures out separately. They did admit, begrudgingly, that it is well below $40/barrel compared to the $80 offered by some industry analysts, and $9.20 for the company’s own weighted average cost. This confirms my belief that the next move in crude is up to $200, and then down to $10, as it is replaced by alternatives over time. Be sure to own PBR on the up leg.

Jun 03 11:46 AM

[ETF STER:]

While I also believe that Brazil is the next "Saudi" find, Petrobras is a Brazilian Government entity. If profits are too high (according to the government) the excess profits will be drained off.

Where will that leave the shareholders of this equity??

Be sure to own it on the way up during the momentum push, but don't be around when the Government wants their share.

Jun 03 01:53 PM

[Vegasbill:]

The value of doubling production by 2020 is of no value to we investors. Many of us will be dead by then. There are far more compelling investment ideas than waiting for eleven years for production to double. I saw the Petrobras presentation at the recent Money Show in Las Vegas. The same concept prevailed, slow growth and many many years for the profits to come. I am too old to wait ten years for a mere doubling of production.

Jun 03 10:10 PM