Higher Realized Prices And Cost Savings To Drive Petrobras’ 1Q’17 Earnings Growth
Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazilian integrated energy company, is expected to post a strong improvement in its March quarter financial results on 11th May 2017((Petrobras To Announce March Quarter 2017 Results, 26th April 2017, www.petrobras.com)), backed by the rebound in commodity prices in the last few months. This, coupled with the better-than-expected refining margins during the quarter, will improve the company’s top line as well as bottom line. Further, the oil and gas company’s efforts to increase its efficiency and reduce its operational costs are likely to boost its profits for the quarter.
Going forward, Petrobras aims to rapidly expand its hydrocarbon production over the remaining years of this decade and has increased its capital spending budget to achieve its targets. However, we figure that higher capital expenditure in a weak oil price environment could weigh heavily on the company’s already skewed balance sheet and hamper its future value.
See Our Complete Analysis For Petrobras Here
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Key Trends Witnessed In 1Q’17
With the production cuts implemented by the Organization of Petroleum Exporting Countries (OPEC) in the first quarter, crude oil prices rose sharply, and averaged at around $52 per barrel during the quarter, as opposed to an average of only $33 per barrel in the same quarter of last year. Further, the Henry Hub gas prices increased from $1.99 per MMBTU in 1Q’16 to over $3.02 per MMBTU in the latest quarter. This rebound in oil and gas prices is expected to result in an improvement in Petrobras’ price realizations, lifting its upstream revenue for the quarter.
Further, the global refining margins increased during the first quarter, despite the rising commodity prices. This trend was visible from the 1Q’17 earnings release of the US integrated companies, such as Exxon and Chevron, last month. Consequently, we expect Petrobras’ downstream operations to post a solid jump, which will lift the company’s overall earnings.
Data Source: US Energy Information Administration (EIA)
In addition, Petrobras has made significant progress to bring down its operating costs over the last few quarters. The company managed to reduce its lifting costs (mostly related to oil and gas production) to $10.30 per boe in 2016, down by over 27% in the last two years. Moreover, with continued focus on developing its pre-salt plays, the company brought down the operating cost in these plays to under $8 per boe. We expect to see similar cost savings in the first quarter results as well, which will enhance the company’s profits for the quarter.
From a strategy point of view, despite the volatility in the commodity markets, Petrobras expects to expand its total (Brazil and international) oil and gas output from 2.62 million barrels of oil equivalent per day (MBOED) in 2017 to 3.41 MBOED by 2021 (Read: A Look At Petrobras’ Production Strategy), growing its production at a compound annual growth rate of around 7% over the remaining years of this decade. In order to augment its growth targets, the company has increased its capital spending budget for the next 3-4 years, with continued focus on exploration and production activities. The oil and gas giant plans to spend a cumulative sum of $74.5 billion as capital investment in the 2017-2021 timeframe, with a focus to develop its upstream operations.
Apart from this, Petrobras has also raised its asset divestment and partnerships target for 2017-2018 from $19.5 billion to $21 billion. The company will utilize these proceeds to finance its capital needs and pare down its debt in the forthcoming years. While this is indicative of the company’s willingness to streamline its portfolio to improve shareholder returns, an aggressive capital spend in a volatile environment could prove to be a burden on the company’s deteriorating cash flows and valuation.
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