Weekly Oil & Gas Notes: Petrobras’ New Oil Discovery And ConocoPhillips’ Surmont 2 Start-up

Oil and gas-linked equities fell slightly last week, primarily driven by lower oil prices in anticipation of a negative outcome from the biannual meeting of the OPEC (Organization of Petroleum Exporting Countries) members. However, the group decided to keep its production target stable at 30 million barrels per day, at least for the next 6 months, reversing some decline in oil prices during the last couple of trading hours on Friday. The cartel is scheduled to meet next on December 4th of this year. The market participants were a bit nervous before the meeting because the last time OPEC members met and decided to keep their production target stable, oil prices fell sharply from above $80 per barrel to as much as $45 per barrel. Since then, cues of a slower production growth from the U.S., and increasing pace of the demand for oil products, has led to a nice recovery of over 40% in benchmark crude oil prices. We believe that spot crude oil prices could move further up from current levels in the short term as the phased impact of drilling cuts starts reflecting in the U.S. production figures, and the supply-demand gap reduces further. Our current 2015 full-year average price estimate for the Brent stands at $75 per barrel. The price of the front-month Brent crude oil futures contract on the ICE decreased by around 3.5% last week and is currently trading around $63 per barrel. The NYSE Arca Oil & Gas Index (XOI) fell by around 1.1%.

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

Petrobras Strikes Oil In The Sergipe Basin

Petrobras’ (NYSE:PBR) exploration program in Brazil has been a huge success for the past few years. The company’s exploration success ratio in the domestic market has increased from just around 59% in 2011 to 70% in 2014. Recently, Petrobras announced that it found a new oil accumulation while drilling an exploratory well located in the BM-SEAL-4 block in the Sergipe Basin’s ultra-deep waters off the coast of Brazil’s northeastern state of Sergipe. The company operates the BM-SEAL-4 concession with a 75% stake in partnership with India-based Oil and Natural Gas Corporation (ONGC) that holds the remaining 25% stake. ^[1]

Petrobras reported that the well confirmed the existence of light crude oil reservoirs with good permeability and porosity conditions that are key to the economics of hydrocarbon extraction. The new discovery is expected to boost Petrobras’ net proved hydrocarbon reserves, which stood at 13.1 billion barrels of oil equivalent at the end of last year. To give some perspective on these numbers, Petrobras held enough hydrocarbon reserves at the end of 2014 to produce oil and gas for the next 14.4 years at last year’s average production rates. ^[2]

• We currently have a $11/share price estimate for Petrobras, which is around 25% above its current market price. The company’s share price increased by around 3% last week.
• We currently estimate Petrobras’ 2015 diluted EPS to be at $0.76, compared to the consensus estimate of $0.80 reported by Reuters.

See Our Complete Analysis For Petrobras

ConocoPhillips Announced First Steam At Surmont 2

ConocoPhillips (NYSE:COP) recently reached a key milestone at its Surmont oil sands project in Canada with the on-schedule start of first steam at Phase 2 of the project. Surmont uses an enhanced thermal oil recovery method called steam-assisted gravity drainage (SAGD). In this process, a pair of horizontal wells is drilled into the reservoir, one above the other with a gap of a few meters between them. After this, high-pressure steam is injected into the upper well to reduce the viscosity of bitumen, which causes it to drain into the lower well, from where it is pumped out to the surface for further processing. Therefore, the start of first steam is a significant step towards first production from the project, which is expected to begin by the the end of the third quarter this year. ^[3]

The Surmont oil sands project is located around 35 miles south of Fort McMurray, Alberta. It is a 50-50 joint venture between ConocoPhillips and Total S.A. ConocoPhillips is the operator of the project. Production from Phase 1 of the project started in late 2007, and produced bitumen at an average rate of around 12,000 barrels per day last year, net to ConocoPhillips. With the start-up of Phase 2 of the project, its gross production capacity is expected to be ramped up to around 150,000 barrels per day by 2017. ^[4]

• We currently have a $63/share price estimate for ConocoPhillips, which is almost in line with its current market price. The company’s share price decreased by almost 1% last week.
• We currently estimate ConocoPhillips’ 2015 adjusted diluted EPS to be at $0.54, compared to the consensus estimate of $0.43 reported by Reuters.

See Our Complete Analysis For ConocoPhillips

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1. Petrobras Discovers New Oil Accumulation At Poco Verde Area In Sergipe Basin, investidorpetrobras.com [↩]
2. Petrobras 2014 20-F SEC Filing, sec.gov [↩]
3. ConocoPhillips Achieves First Steam At Surmont 2, conocophillips.com [↩]
4. ConocoPhillips 10-K Sec Filing, sec.gov [↩]