Weekly Oil & Gas Notes: Petrobras’ Asset Writedown and Exxon’s New Project Startup

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Petroleo Brasileiro

Oil and gas stocks slightly strengthened this week as benchmark crude oil prices remained largely flat after falling sharply by more than 57% since hitting a short-term peak in June of last year, due to slower demand growth and rising tight oil supply in the U.S.  The price of the front-month Brent crude oil futures contract on the ICE remained largely flat around $49/barrel this week and is currently trading around the same level. The NYSE Arca Oil & Gas Index (^XOI) grew by around 3%. We believe that the recent decline in oil prices could sustain for a longer period amid slower demand growth and diminishing price-controlling power of the OPEC (Organization of Petroleum Exporting Countries). According to our estimates, annual average crude oil prices (Brent) could bottom out around $80-85 per barrel by 2017 and rise back to $100 per barrel by 2020. (See: Where Are Crude Oil Prices Headed In The Long Run)

Below, we provide an update on some of the key events that occurred this week related to the oil and gas companies we cover.

Petrobras’ Asset Writedown

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The O Globo newspaper recently reported that Petrobras (NYSE:PBR) might take a $3.9 billion write down in its delayed 2014 third quarter earnings announcement, citing unnamed sources in the Brazilian government. The amount is very close to the $4 billion asset devaluation that we have already included in our current price estimate for the company. The expected write-down is a result of ongoing investigations into the bribery and corruption scandal that hit Petrobras after one of the company’s former executives alleged that it systematically overpaid construction companies hired on contract work and that the excess funds were kicked back to politicians from the ruling party and its allies. [1]

  • We currently have a $13/share price estimate for Petrobras, which is around 70% above its current market price. The company’s share price increased by around 5.5% this week.
  • We currently estimate Petrobras’ 2015 diluted EPS to be at $1.45, compared to the consensus estimate of $1.24 reported by Reuters.

See Our Complete Analysis For Petrobras

Exxon’s New Project Startup

Exxon Mobil (NYSE:XOM) recently announced the start-up of production from the Arkutun-Dagi field located off the northeast coast of Sakhalin Island in the Russian Far East. The development of the field is a part of the company’s Sakhalin-1 project that includes two other fields – Chayvo and Odoptu – which began production in 2005 and 2010, respectively. Exxon expects production from the Arkutun-Dagi field to be ramped up to 90,000 barrels per day in the coming months. This would boost total production from the Sakhalin-1 project to over 200,000 barrels per day. Exxon is the operator of the Sakhalin-1 project with a 30% interest. Other stakeholders in the project include Sakhalin Oil and Gas Development Company Ltd. (30% Stake), ONGC Videsh Ltd. (20% Stake), Sakhalinmorneftegas-Shelf (11.5% Stake), and Rn-Astra (8.5% Stake). [2]

  • We currently have a $98/share price estimate for Exxon Mobil, which is around 5% above its current market price. The company’s share price increased by around 1% this week.
  • We currently estimate Exxon’s 2015 GAAP diluted EPS to be at $7.43, compared to the consensus estimate of $4.65 reported by Reuters.

See Our Complete Analysis For Exxon Mobil

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Notes:
  1. Petrobras Plans $3.9 Billion Asset Writedown For Third Quarter, reuters.com []
  2. Exxon Mobil Begins Production At The Sakhalin-1 Arkutun-Dagi Field, exxonmobil.com []