The majority of Petrobras' (PBR) portfolio of oil and gas producing assets are located in the Campos basin located in offshore Brazil, which is an important area of operation for the company. However, over the years, the company faced decreasing production from the wells in the region. To overcome this decline in production and to meet its production targets, Petrobras is planning to extract oil and gas from newer wells in the Campos Basin. Additionally, the company is divesting assets to shore up finances for its five year investment programs.
Ramping up in the Campos
In August this year, Petrobras' production of oil and natural gas liquids, or NGL, from its fields located in Brazil was around 1.908 million barrels per day, or mbpd, which is 1.1% higher than the production in July this year. The production from Petrobras' Brazilian fields is behind the target production output of 2 mbpd of oil and NGL. This will require the company to grow its production for the remaining quarter of this year by around 4.8%.
Declining production of output from wells in the Campos Basin, Brazil's oldest oil producing region is a cause of concern for Petrobras. The Campos Basin produces 80% of the oil produced in Brazil, and it is the biggest operating zone for Petrobras. It is estimated that around 85% of the wells in the Campos Basin are experiencing decline in output due to natural decay of the wells at a rate of 10% per year. In order to balance out this decreasing well production, Petrobras plans to bring new wells into operation during the second half of this year. So, the company is commissioning the P-55 semi-submersible platform. This platform is used to extract and process oil and gas. In addition to P-55, Petrobras is also commissioning the P-63 floating production storage and offloading, or FPSO, in the region. A FPSO is a floating vessel used for offshore processing and storage of hydrocarbons.
The P-55 semi-submersible platform has the capacity to connect to 17 wells. Among the 17 wells, 11 will be used for extraction of oil and natural gas and the rest will be used for water injection. At full capacity, the P-55 platform can produce 180,000 barrels of oil per day and 6 million cubic meters of gas per day and is expected to start production from the Roncador field in the Campos Basin by the end of this year. Additionally, Petrobras is also commissioning the P-63 FPSO at the Papa-Terra field in the Campos Basin. The P-63 has a capacity to process around 140,000 barrels of oil and 1 million cubic feet of gas per day. The P-63 is expected to start production from October 23 of this year.
Oil in the Libra
Libra is an ultradeepwater oil field located in the Santos Basin in Brazil. The government in Brazil is auctioning the oil blocks located in this field to oil and natural gas companies. The Libra oil blocks, which are estimated to have a crude reserve of around 8 billion barrels to 12 billion barrels, will be auctioned on October 21 this year. The estimated cost of developing the blocks in the Libra oil field is around $200 billion. According to the rules of the auction, Petrobras will be obligated to have a minimum 30% stake in all the oil blocks that are auctioned.
One of the bidders is Oil and Natural Gas Corporation, which is aggressively looking to expand its oil assets. ONGC is increasingly looking for oil assets abroad for energy security in India. The company has paid a fee of around $886,104 to participate in the bidding process. The company already has a presence in the Parque das Conchas field in the Campos Basin, where production fell from a peak of 90,000 bpd in 2010 to around 35,000 barrels of oil equivalent per day, or boepd, this year. In order to compensate for this falling production, the company needs to venture out for newer oil producing assets.
The reserve prospects of the Libra oil field are also attracting another major player, Royal Dutch Shell (RDS.A) (RDS.B). A reason for Royal Dutch Shell's participation in the Libra oil fields could be the company's focus in deepwater oil exploration in the long term. The company also has presence in the Parque das Conchas field along with ONGC. Royal Dutch Shell also operates in the Bijupirá/Salema fields, where it plans four production wells with a maximum output of 35,000 boepd by next year.
To meet divesting targets
Petrobras is also generating cash from the sale of its non-core assets. Its asset divestment target for this year is $9.9 billion and has achieved a sale $4.78 billion till October of this year, which is shown in the table below:
Sale Amount ($ million)
Parque das Conchas
Brasil PCH S.A.
Petroquímica Innova SA
Gulf of Mexico assets (MC613, GB244, E W910)
Gulf of Mexico (KC 49, 50, 92, 93, 94 and 138)
Block 3 and block 4, Punta del Este
The sale of asset is done to finance the company's $237 billion five year investment program, which brings the average annual capital expenditure to around $47 billion. With the investment plan, the company plans to increase the total production output to around 2.7 mbpd up to 2017 from the current year target of around 2 mbpd. We expect that Petrobras will announce more divestments through the remaining of this year in order to reach its divestment target of $9.9 billion.
Price increase expected-Is it good or bad?
During the first half of this year, Petrobras' net import of crude oil and oil products was around 400 mbpd which is higher than the first half of last year's imports of 110 mbpd. The import of crude oil and oil products is weighing down the company's margin because of the difference between import parity and the selling price in Brazil. Import parity is the price of domestically produced goods that is set equal to the imported good. In other words, the imported price of oil in Brazil will be derived by adding up the market price of oil, the tariff imposed and the transportation cost to Brazil. The domestically produced oil, when set equal to the imported price, gives the parity between the two prices. In Brazil, the import parity of diesel and gasoline price is around 30%, i.e the difference between the two prices is 30%. This results in a loss for Petrobras on oil imports. The government in Brazil regulates the price of fuel. With the Brazilian government contemplating increasing the price of gasoline and diesel by around 8% by the end of October, it would reduce the losses from import of oil for Petrobras. As can be seen, there is still a gap between the discount on import parity and the price increase expected, which might reduce Petrobras' operating income and strain the company's huge five year investment plan.
Another factor adding contributing to the oil price issue in Brazil is the depreciation of its currency, the Brazilian real. The following graph shows the Brazilian real's movement against the U.S. dollar. In general, a depreciation of the Brazilian currency will add to the cost of the imported oil in Brazil. As can be seen from the graph below, the Brazilian "real" is still much higher than the levels last year in October. This is adding to the cost of imported oil.
Petrobras currently trades at a P/E ratio of 7.67 with a forward P/E of 7.89. However, even with a high forward P/E, the company's strong focus on growth makes it an attractive investment. The company has taken definite steps to ramp up production from the Campos Basin, and it will likely meet its production targets. Also, Petrobas' stake in the various blocks in the Libra oil field secures its future production target growth. With divestment of non-core assets in place, the company continues to meet its five year plan. Aside from the price factor, because of its political nature, we continue to believe that the company's fundamentals are strong, and thus we give a buy to the company.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.