2012 was a bad year for Petrobras (NYSE:PBR). Bad investments, like buying a refinery in Pasadena, California and reduced oil production were some of the reasons why last year was less-than-perfect.
The purchase of the refinery in Pasadena was a mistake because Petrobras paid about $1 billion and when it tried to sell it, the company received an offer of only $180 million. On the other hand, oil production was low as well at 1.9 million bpd in January 2012, when compared with 2.1 million bpd in January the previous year.
However, this situation is beginning to change. I shall list 3 operational reasons why Petrobras' future looks promising:
1. Oil, pre-salt and natural gas production numbers look encouraging
The total extracted oil saw a moderate increase to 2.5 million barrels per day between May and June this year. Investments in the pre-salt are already beginning to make profit. The pre-salt production reached 300,000 boe in February 2013 . Average natural gas production at onshore fields hovers around 17.9 million cubic meters of gas/day.
2. Production levels to increase to 20 million boe by 2020
Petrobras is going to build a $20 billion refinery in Maranhao, Brazil with the help of Sinopec. This refinery alone is expected to churn out more than 300,000 barrels a day. The Maranhao refinery in conjunction with 3 other refineries will help Petrobras to reach a production target of an astounding 3 million boe per day by 2020. This will help Petrobras to become one of the largest oil and gas producers in the world.
3. Petrobras' profits are improving
Another positive signal with respect to Petrobras is the profit it earned in the last quarter, which was about $3 billion, reversing a loss of $500 million in the same period last year. Petrobras achieved this turnaround thanks to a reduction of costs resulting from disinvestment in 6 countries. The increased production of oil derivatives in Brazil will help Petrobras in the long term to make up for its losses.
Petrobras is going to get leaner and meaner
Other than increasing production and improving operations, Petrobras has begun to cut costs and raise more money by selling assets. The company announced that it would cut costs by $14.2 billion. Moreover, the company announced that it would raise almost $10 billion by selling its less desirable assets and restructuring those which hold promise. At the end of the day, this helps Petrobras to become a leaner and meaner company that has less baggage and burden on its shoulders.
The company has looked at reducing domestic costs too, by importing LNG from Sonangol, Angola. This will help the company to distribute the much needed LNG to Brazilian customers and sell what it produces abroad in order to gain more profits. What is really impressive is the way the company has begun to restructure its operations, transportation and logistics, which have often been its biggest issues considering how huge Brazil really is.
Petrobras' long term outlook is attractive
Petrobras looks quite promising when we look at its financials. With a market cap of $88 billion and a profit margin of 6.83%, it is one of the largest oil and natural gas producers in the world. The company has a revenue of $141.33 billion, which proves that it is a great investment option.
Petrobras holds promise for those who are looking for long term benefits, and are willing to wait it out until the company gets leaner. And that is a process, which Petrobras has already begun to undertake.
The competitors are not faring well
Royal Dutch Shell's (RDS-A) profits fell significantly in the second quarter to $1.74 billion. This is due to a loss of $2 billion in the United States. The company revealed to investors that its problems will not be solved easily. In fact, Shell has considered selling some of its businesses in the United States. Another problem that Shell faces is security issues in Nigeria, where it has faced armed robberies, sabotaging of its facilities and environmental disasters. Most importantly, Shell recently announced that it would divest 53.25% stake in its Olokola LNG project at Ogun and Ondo states in Nigeria. The company has suffered heavy setbacks and all expatriates in its Nigerian facilities have already left.
Exxon Mobil (NYSE:XOM), which has been trying to explore new oil fields in West Qurna, Iraq has suffered serious setbacks. The company has been chastised for operating in Kurdistan, where the Iraqi central government believes ExxonMobil has no right to explore or operate. The company's quarterly profit declined due to lower oil production. Its profit was $6.9 billion, giving a profit of $1.55 per share, and the expected value was $1.90. However, ExxonMobil is still one of the largest oil and gas producers out there and in the near future, it should be able to pull itself out of the mess in Iraq.
When we look at Petrobras, it is clear that the company has faced problems in the past. However, Petrobras has actively taken steps to become a leaner organization that has more money in its hand. It has increased its production and is working closely with Chinese buyers, which will ultimately help it to increase its profits. Though it may not attract investors with short term goals, it is certainly a great buy for those with long term interests.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.