Petrobras’ 2Q’17 Earnings To Surge Backed By Higher Price Realizations And Cost Savings

Petroleo Brasileiro Petrobras (NYSE:PBR), the Brazilian integrated energy company, is expected to post a strong improvement in its June quarter financial results on 10th August 2017((Petrobras Announces June Quarter 2017 Results, www.petrobras.com)). The company’s upstream business is likely to witness a rise in its revenue due to higher price realizations compared to the same quarter of last year, which will drive the company’s top-line growth for the quarter. Also, the oil and gas major’s earnings are expected to come in higher backed by its cost reduction measures during the quarter. Besides, in line with its peers, we expect Petrobras to pull back its capital spending budget for the year in the wake of the growing volatility in the commodity markets.

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Key Trends Witnessed In 2Q’17

• The rally in crude oil prices due to the OPEC production cuts came to a halt as the US oil production and inventory levels rose sharply in the second quarter. As a result, the WTI crude oil prices dropped from an average of $52 per barrel in the first quarter of 2017 to $48 per barrel in the latest quarter. Consequently, we expect Petrobras’ upstream price realization for the quarter to be lower than that of the previous quarter, impacting its June quarter revenues on a sequential basis.

Source: Google Finance; US Energy Information Administration (EIA)

• In June, Petrobras’ (own and partners’) oil production in the pre-salt layer reached monthly production of 1.35 million bpd, and a daily rate of 1.42 million barrels. In addition, the production of oil and natural gas operated reached a new record of 1.69 million boed. Consequently, we expect to see a surge in the company’s 2Q’17 production numbers and its revenues.

• During the quarter, the company issued debentures of a total sum of $1.6 billion, or 5 billion Reais, of which roughly $256 million, or 800 thousand Reais, will be allocated in the first and/or second series. While the new debt is relatively small compared to the already huge debt that the company has on its balance sheet, any amount of incremental debt will only increase the credit risk of the investors.

• That said, the integrated company announced its plans to sell its assets in Paraguay and Campo de Maromba, in the Campos Basin in the second quarter. In Paraguay, the company operates in the distribution and trading of fuels, LPG and lubricants, and serves as the largest fuel distributor in the country. On the other hand, the company’s assets in Campo de Maromba represent an opportunity to develop and monetize a discovery of shallow-water heavy oil near the Pilgrim and Papa-Earth production fields. The sale of these assets will allow the company to raise some funds to bring down its exorbitant levels of debt and enhance its capital structure.

• Lastly, Petrobras announced a strategic partnership with China National Petroleum Corporation (CNPC) to jointly evaluate opportunities in Brazil and abroad in all the segments of the oil and gas chain, including potential structuring of funding. The realization of partnerships is an important strategy of Petrobras’ 2017-2021 Business and Management Plan, as it will not only bring in new investment avenues but also allow sharing of risks, and technological expertise that will benefit the company.

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