Petrobras Reports Increases In Production From Brazil - Is This A Sign Of Hope For The Company?

| About: Petrobras - (PBR)

Summary

Petrobras’ production from Brazil rose by 0.8% in the month of September and amounted to 2,781 thousand barrels of oil equivalent per day.

The reason behind this remarkable increase in total production in Brazil stems from the launch of six new offshore wells in the Santos and Campos basis.

Oil demand forecasts have been cut by the IEA, which indicates that oil prices are likely to decline in the future as oil demand remains weak.

The results of the second quarter showed that the company suffered from declines in its margins, even though revenues for the company increased.

The 52 week range for share prices is $10.20-$20.94. The 1 year estimate for share prices is at $18.55.

Petroleo Brasileiro Petrobras (NYSE: PBR) reported its total production from its facilitates for September. For the month of August, production from Brazil and abroad stood at 2,759 thousand barrels of oil equivalent per day. The production rose by 0.8% in the month of September and amounted to 2,781 thousand barrels of oil equivalent per day.

Oil production in Brazil registered a 0.6% rise from the month of August alone, and production rose from 2,105 thousand barrels of oil per day to 2,118 thousand barrels of oil per day in September. Moreover, Petrobras also registered increases in its oil production that it operates with partners as well. The total production for Petrobras for the month of September registered a 0.3% increase, and reached 2,239 thousand barrels per day.

Natural gas production by Petrobras amounted to 80 million 132 thousand million cubic feet per day.

The total oil and natural gas production for Petrobras (including the share of production that it produces in partnership with other firms) rose by 0.3% from August, and amounted to 2,743 thousand barrels of oil equivalent per day by the end of September.

Production growth in Brazil

The reason behind this remarkable increase in total production in Brazil stems from the launch of six new offshore wells in the Santos and Campos basis. 53 new wells have begun operating this year. Petrobras noted that the ramp up of production from the P-55 and P-62 platforms was the reason for this drastic increase in production.

Production expansion likely to continue

During a presentation in Moscow at the World Petroleum Congress, Petrobras revealed future plans of how it intends increase investment to further exploration and production activities for the company itself. The exploration general manager of the company spoke about the company's intention to invest approximately $153.9 billion between 2014 and 2018. The company plans to invest a total of $23 billion for exploration, out of which $6.4 billion will solely be allocated for the exploration of the pre-salt layers that are known to be rich in hydrocarbon reserves. $112.5 billion will be allocated towards investing in production during the period, out of which 64% of the budget will be invested in the pre-salt later. $18 billion has been set aside for infrastructure investments by the firm.

Pre-salts only account for 16% of the company's production at the moment, but the company plans on increasing this figure to about 53% by 2020.

In addition to this investment budget, partners of Petrobras are expected to contribute about $44.8 billion for exploration and production as well, which means that the company plans on investing approximately $200 billion for the period to expand its production and exploration activities.

Overview of Q2 financial results

The financial results released for the second quarter reported revenues at $36.9 billion, 7% higher than the revenues that were reported in the first quarter. Revenues had increased by nearly 4% over the prior year as well.

Gross margins for the company declined relative to the first quarter and the second quarter of the previous year, and were reported at 23%. Gross profit for the quarter was reported at $8.5 billion.

The increases in revenues did not trickle down to increases in net income for the company. Net income attributable to shareholders was reported at $2.22 billion. This was 2% lower than the net income of $2.28 billion reported in the previous quarter. Moreover, this was 25% lower than the net income of $3 billion reported in the second quarter of 2013.

Net margins of the company declined by 1%, relative to the previous quarter and were reported at 6% for the second quarter. Earnings per share was reported at 18 cents; 3% higher than the previous quarter, but 21.7% lower than the 23 cent earnings reported in the same quarter of the prior year.

Future Challenges

Oil price volatility is a major challenge that is faced by oil and gas asset owners as oil prices not only continue to remain depressed, but seem to slipping even lower than before. Recently, the IEA had cut its demand forecast for oil, for this year and the next year, causing oil prices to slip even further. The agency emphasized that the demand cuts were due to the weak global economic environment.

Furthermore, the agency discussed the oversupply situation in the oil market and warned that if firms continue to supply oil into the market, when oil demand does not pick up, prices for oil could slip even further to alarming levels.

This is a concern for Petrobras, especially because it has plans to invest heavily in exploration and production over the next few years. If oil prices fall, the company would find a decline in its top line as its products would sell for less in the market. Given that the company is already incurring major investment costs, and has planned for large sums in the future, margins and net income for the company could tumble even lower, especially if oil prices do not exhibit any trend of recovery.

Outlook for investors

For investors, the spike in production from Brazil comes as a good sign since it is an indication of increases in revenues for the company. However, the volatile oil market brings concerns about future revenue declines for the company.

What is even more of a concern for investors is that the company is suffering from a decline in its margins, relative to the results that it reported last year. The company has a debt to equity ratio of 0.84, which is significantly higher compared to the industry average. Moreover, it is alarming as it implies that debt management of the company is poor. Return on equity of the company is also lower than the industry average.

Share prices for the company have slipped at an alarming rate, especially over the past 1 year. Share prices did exhibit some recover after March and have taken up a bullish trend ever since, but have continued to remain volatile. The 52 week range for share prices is $10.20-$20.94. The 1 year estimate for share prices is at $18.55, below the 52 week high range of prices. The shares currently trade between the 52 week low and one year target estimate, and could be seen as a bargain for investors.

However, the bigger question is; should investors invest in Petrobras? For now, more reasons go against the investment, than in its favor. The declines in margins are a cause of concern for investors, because they are a reflection of the company's inability to control costs. Furthermore, the trend that oil prices have been playing out indicates that Petrobras could face declines in its revenues in the future. Given that the company has allocated a $200 billion budget for investing in its operations, earnings could decline in the future for the company. For now, investors should steer clear of investment in Petrobras, at least until the margins of the company begin to show signs of recovery, and the prices of oil achieve some sort of stability.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , , , Oil & Gas Drilling & Exploration, Brazil
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