Weekly Oil & Gas Notes: Petrobras’ March Production and Financial Results Announcement

Oil and gas stocks strengthened this week as crude oil prices rose on reports that the U.S. shale oil boom might be very close to a short-term peak. In addition, a much smaller than expected increase in commercial crude oil inventories in the U.S. coupled with a decline in gasoline stocks in the country signaled an improvement in the demand for petroleum products, which further supported the rally in benchmark crude oil prices. ^[1] The U.S. Energy Information Administration (EIA) expects crude oil production from the fastest-growing tight oil plays in the U.S. to register a sequential decline of around 45,000 barrels per day next month. ^[2] Most of the decline in production is expected to come from the Eagle Ford and the Bakken shale plays, where the major operators have significantly cut back their growth plans this year to maximize returns when in a more favorable commodity price environment. This means that the OPEC’s (Organization of Petroleum Exporting Countries) strategy of undercutting rising non-OPEC supplies is working, and there could be some recovery in global crude oil prices from current levels by the end of this year. The price of the front-month Brent crude oil futures contract on the ICE increased by around 9.2% this week and is currently trading around $63.50 per barrel. The NYSE Arca Oil & Gas Index (XOI) grew by around 3.1%.

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’ March Production and Financial Results Announcement

Brazil’s state-owned oil giant, Petrobras (NYSE:PBR), recently announced its March 2015 hydrocarbon production figures. The company’s total oil and gas production in Brazil increased to 2,574 thousand barrels of oil equivalent per day (MBOED), up almost 10.5% over March 2014. Its domestic crude oil production grew by 9.5% from 1,925.9 thousand barrels per day (MBD) in March 2014 to 2,108.2 MBD during the last month. Most of the growth in production came from increased development of the company’s pre-salt reserves offshore Brazil. Its operated production from pre-salt reserves in the Santos and Campos Basins stood at 672 MBD in March, up more than 70% from last year. ^[3] The expression “pre-salt” refers to an aggregation of rocks that hold hydrocarbon reserves and are located in ultra-deep waters in a large portion of the Brazilian coast. It is called pre-salt because the rock interval ranges under an extensive layer of salt, which can be as much as 2,000 meters thick. The term “pre” is used because these rocks were deposited before the salt layer. The total depth of these rocks can be as much as 7,000 meters from the surface of the sea. Petrobras plans to invest a lion’s share (more than 60%) of its net capital expenditure on the development of these reserves, which are expected to contribute more than 50% to its net production by the end of this decade. The chart below shows how the company’s crude oil production in Brazil has trended since the beginning of 2013.

Source: Petrobras’ Operational Highlights

Separately, Petrobras plans to announce its audited financial results for the third quarter and full-year 2014 on April 22, after a delay of several months, primarily because of ongoing investigations into the alleged bribery and corruption scandal that has hit the company. We expect the focus on the potential impact of the ongoing probe to overshadow the improvements in the company’s key business drivers, such as net upstream production and downstream margins. In addition to that, we also expect lower benchmark crude oil prices and the depreciation of the Brazilian Real against the U.S. Dollar to weigh on the company’s financial results. ^[4]

We recently updated our price estimate for Petrobras to $11/share, based on an increase in its weighted average cost of capital (due to higher average bond yield) and the changed crude oil price environment. We expect Petrobras’ 2014 diluted earnings per share to be around $1.36, compared to the consensus estimate of $1.15. The company’s share price increased by around 12% this week. (See: Petrobras’ Cost of Capital Set To Rise After Moody’s Downgrade)

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More Trefis Research

1. U.S. Oil Stockpiles Show Smallest Rise This Year, reuters.com [↩]
2. U.S. Shale Output to Fall in May, First Drop in 4 Years, reuters.com [↩]
3. Oil and Natural Gas Output for March, investidorpetrobras.com [↩]
4. Financial Statements, investidorpetrobras.com [↩]