Petroleo Brasileiro Petrobras (NYSE:PBR), or Petrobras, announced on Tuesday that it had extended its agreement with Bolivian state-owned firm YPFB, which would continue supply natural gas to a thermoelectric power plant in Brazil till December 31, 2016 as a part of the Gas Supply Agreement (GSA). The deal has also provided clarification with regards to the various interpretations of the GSA via inter-party compensations.
The agreement between PBR and YPFB is of advantage for both the concerned parties, because not only does it offer short-term incentives, the deal also provides the Brazilian company the opportunity to enhance production and exploration of Bolivian natural gas. The deal ensures that any natural gas that PBR would extricate would be liable for preferable allocation to Brazil.
The deal's positive impact on PBR's Q3 numbers isn't going to be tangible, with the Brazilian firm set for a $268 million loss. Even so, the calendar year's result should witness positivity for PBR with an expected $128 million profit.
PBR and the Rising Demand in Brazil
PBR is vertically integrated, with the oil and gas company operating in both upstream and downstream sections. It happens to be among the largest Latin American companies as far as annual sales are concerned. The Brazilian energy giant's operations are responsible for the largest chunk of overall Brazilian oil and gas production. In 2013, PBR averaged around two million (1,931,400) oil barrels per day, which is around 91% of the overall oil production in Brazil.
The electricity demand in Brazil is met by hydroelectric power plants, which possess a total capacity of 85.7 Giga Watts (GW). This is worth 68% of the Brazilian power generation capacity, which in turn means that the likes of PBR - being thermoelectric - do not supply much to the national grid.
Even so, weather changes influence the role of thermoelectric power suppliers, since the hydroelectric plants are inherently dependent on rainfall. The share of thermoelectric power producers is inversely proportional to the annual rainfall and with Brazil's southeast traversing its worst drought in nearly half a century, the role of PBR becomes extremely prominent.
With the dam levels reaching their nadir - lowest since 2001 - the onus is on natural gas to bridge the demand-supply gap since the thermoelectric plants are mostly fueled by gas.
PBR recently stated that the total demand for natural gas in Brazil had increased y-o-y by 6% during Q2 of the ongoing calendar year. This in turn has resulted in a 10.4% hike in natural gas import with PBR's deal with YPFB all set to enhance that number. PBR has increased its power production from 4.0 GW last year to 4.7 GW as things stand. The national grid operator, ONS, claims that considering the rain shortfall, thermoelectric power producers would be kept in back till 2015 at the very least. This of course means that PBR gets to generate more revenue through more electricity sales in the near future.
PBR's EBITDA margin has taken a plunge in the last half a decade, falling to 1.4% last year from 14% in the year 2009. Escalating crude oil prices and decreasing price realization have played their due part in conjuring these numbers. The margin should be slightly ameliorated in the long run, and is expected to touch the 3% mark owing to the converging prices of gas, diesel and refined petroleum coupled with enhancement in productivity.
PBR's average hydrocarbon production increased to 2.16 million last year from 2009's 2.10 million oil barrels every day. The company is targeting 5.2 million daily oil barrels by the year 2020, which clearly shows PBR's growth intent. Even though the targeted numbers might be ambitious, any significant amount of growth in hydrocarbon production coupled with the national grid's increasing electricity demand, provide the Brazilian oil and gas giant the ideal opportunity to bolster its revenue numbers starting from Q4 this year.
While PBR is a strictly no-go zone for investors till Q3 culminates, Q4 and beyond promises contrasting fortune for the Brazilian company. Its natural gas deal with YPFB, while being absolutely pivotal for Brazilian electricity and natural gas demand, would also see PBR increase its revenue. Furthermore, the deal also provides PBR the opportunity to cash in on the expected natural gas reserves in Bolivia. PBR's expected estimate of $128 million profit after Q4 could pale in front of the actual numbers that the company posts at the end of the current calendar year.
Hold on to your horses and wait for the details of the PBR-YPFB deal to be finalized. If everything goes smoothly PBR would soon be a lucrative buy.
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