Petrobras Set To Post A Strong Quarter Backed By Recovery In Oil Prices

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PBR: Petroleo Brasileiro logo
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Petroleo Brasileiro

Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazilian integrated energy company, is slated to release its December quarter and full year 2016 financial results after the market closes on 21st March 2017 [1]. Given the rebound in crude oil prices in the fourth quarter, the market expects the company to post a notable improvement in its top line as well as bottom line for the quarter. For the full year, however, the company’s performance is likely to remain depressed due to the persistently low prices during the year.

PBR-Q&A-4Q16

The December quarter was a good quarter for commodity prices, as the OPEC and some Non-OPEC members decided to curtail their combined oil production by 1.8 Mbpd over the next few months. As a result, WTI crude oil prices rose up to $49.21 per barrel at the end of the quarter, recovering around 10% during the quarter, while Henry Hub natural gas prices ended the quarter at $3.71 per Mcf, increasing more than 30% in the same period. Given this improvement in commodity prices, we expect Petrobras’ price realizations for its upstream production to go up sharply, which is likely to boost its revenue for the quarter.

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PBR-Q&A-4Q16-2

Source: US Energy Information Administration (EIA)

Petrobras has seen a drastic fall in its profitability over the last few quarters. However, in order to weather the negative impact of plummeting commodity prices, the oil and gas giant aims to control its operating costs over the next few years. According to the company’s Business and Management Plan (BMP) for 2017-2021, it aims to reduce its manageable operating costs for the period to $126 billion, almost 18% lower than its previous expectations. Manageable operating costs include lifting, refining, logistics and distribution, overhead, and other expenses that the company has to undertake to carry out its operations.

Further, the company is now focusing more on exploring and developing its pre-salt reserves, since these reserves are believed to have large accumulations of extremely high quality, and commercial value light oil. For this reason, the output from these regions generates a much higher EBITDA per barrel compared to the oil produced from onshore as well as offshore (deep and ultradeep water) plays, making it the company’s most profitable play. Thus, the company expects to improve its profitability in the coming quarters.

Petrobras’ Lifting Costs ($/barrel) – Pre-Salt

PBR-Q&A-lifting cost

On the operational front, Petrobras has an optimistic outlook for its production growth over the next 4-5 years. The company targets to grow its domestic liquids production to 2.77 MBOED, a jump of over 7.5% annually over the next four years. In addition, the company aims to increase its domestic natural gas production to 0.57 MBOED during the same period. This implies a compound  annual growth rate of around 7% on the total hydrocarbon production over the remaining years of this decade. While such a big jump in the oil and gas output could be a huge upside for any company in a strong price environment, it could be detrimental for Petrobras if the commodity prices do not recover as quickly as the company is anticipating.

PBR-Q&A-prod-1

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Notes:
  1. Petrobras To Announce December Quarter 2016 Results, www.petrobras.com []