Petroleo Brasileiro Petrobras (NYSE:PBR) recently announced that oil production from fields operated by it in the pre-salt areas of the Santos and Campos Basins offshore Brazil has exceeded 500,000 barrels per day. The importance of this milestone lies in the fact that the company has been able to ramp up oil production from 0 to over 500,000 barrels per day in just 8 years after the first pre-salt discovery in 2006. Just to give some perspective, it took Petrobras 31 years from the time it was founded in 1953 to ramp-up its total production rate to the same level. The company’s pre-salt production ramp-up record looks good even in comparison to other important deepwater production areas around the world. For instance, it took 20 years for oil production from the Gulf of Mexico to reach 500,000 barrels per day after first discovery. 
Petrobras is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. Its operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily oil production in Brazil was 1,931.4 thousand barrels per day (MBD), an estimated 90.9% of Brazil’s total oil production. 
We currently have a $17/share price estimate for Petrobras, which values it at almost 8.1x our 2014 diluted EPS estimate of $2.1 for the company.
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We believe that Petrobras’ future cash flow growth relies significantly on the pace of development of its pre-salt reserves. The company’s average daily hydrocarbon production has grown marginally from 2.1 million barrels of oil equivalent per day (MMBOED) in 2009 to 2.16 MMBOED in 2013. However, it plans to ramp up its hydrocarbon production to 5.2 MMBOED by 2020. Most of this growth is expected to come from the development of its pre-salt reserves offshore Brazil. 
Between 2014 and 2018, Petrobras plans to invest $153.9 billion in the exploration and production of hydrocarbons in Brazil. It plans to invest a lion’s share of this amount ($112.5 billion or 73%) in the development of existing proved reserves, with more than 64% of that going into the development of pre-salt reserves. Currently, production from pre-salt reserves accounts for just around 22% of Petrobras’ total oil production but the company plans to increase this figure to 53% by 2020. 
A significant aspect of Petrobras’ pre-salt operations is well productivity. According to the company, wells currently installed in the pre-salt area have been showing much higher productivity than the world average. At 520,000 barrels of oil per day from just 25 installed wells, the company is producing almost 21,000 barrels of oil per day from a single well. Some pre-salt wells in the Santos Basin are even producing 31,000 barrels of oil per day. This compares to average well productivity of just around 15,000 barrels per day in the North Sea and around 10,000 barrels per day in the Gulf of Mexico. 
Higher well productivity is the key to offsetting higher development costs associated with pre-salt reserves. Drilling a single well in the pre-salt area can cost anywhere between $200-300 million, which compares to around $50-$150 million in the deepwater Gulf of Mexico. This is the key reason we do not expect to see a significant downside in Petrobras’ upstream margins even as the proportion of pre-salt production in its total hydrocarbon production increases sharply. Notes:
- Pre-salt Production Breaks New Record And Surpasses 500 Thousand Barrels Of Oil Per Day, investidorpetrobras.com [↩] [↩] [↩]
- Petrobras 2013 20-F SEC Filing, sec.gov [↩]
- Webcast 2013 Results, 2030 Strategic Plan and 2014-2018 Business Plan, investidorpetrobras.com [↩]
- Pre-salt Developments Change The Game In Brazil, energyboardroom.com [↩]