Petroleo Brasileiro S.A. ADR C (PBR): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report


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We are upgrading the Brazilian state-run energy giant Petrobras to Neutral from Underperform, despite a miss in its delayed third-quarter results. The company announced several initiatives like reduction in its 2015 exploration spending and asset sales to tackle its liquidity problems. Moreover, a change in management as several people associated with the multibillion-dollar money laundering case were removed from position could bring good tidings for the firm. However, since the third-quarter result did not include any picture of the scandal or estimate of its impact, the company's credibility remains a question. As such, we remain apprehensive of the stock performance in the near-term.


Headquartered in Rio de Janeiro, Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company's activities include: exploration, exploitation and production of oil from reservoir wells, shale and other rocks, as well as refining, processing, trading and transportation of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

Petrobras was founded in October 1953 to conduct the Brazilian government's hydrocarbon activities, which currently holds a 28.7% stake (and 50.3% voting share) in the company. Its American Depositary Receipts represent 20.6% of preferred shares and approximately 21.5% of common shares. The company operates in six segments: Exploration and Production', Refining, Transportation and Marketing', Distribution', Gas and Power', Biofuels' and International'.

Exploration and Production (E&P): This segment includes the company's domestic E&P operations, mostly located in the offshore Campos Basin, which is Brazil's largest oil region and is one of the most prolific oil and gas areas in South America. As of year-end 2013, Petrobras had approximately 16.6 billion barrels of oil equivalent (BBOE) in proved reserves (as per SPE or Society of Petroleum Engineers guidelines), representing a marginal increase from the year-ago period. The company's oil and gas production in 2013 averaged 2.5 million barrels of oil equivalent per day (MMBOE/d), of which more than 91.4% came from its domestic operations.

Refining, Transportation and Marketing: This segment houses the company's domestic refining, transportation and marketing assets. Petrobras owns and operates 12 refineries in Brazil with a gross aggregate capacity of 2.0 million barrels per day (MMBbls/d), accounting for about 82% of the country's total refining capacity. Petrobras also operates 3 refineries outside Brazil, with a total capacity of 1,694 thousand barrels per day (MBbls/d). Approximately 80% of the company's refining feedstock needs are met through domestic production activities, while the rest are met through imports. Petrobras is in the process of upgrading its refining assets to enable processing of its own productions, which are heavier in nature. The company owns a network of marketing centers, storage facilities, pipelines and shipping vessels to transport crude oil and refined products to the markets.

Distribution: This segment is engaged in the distribution of oil products, fuel alcohol, and natural gas to retail, commercial, and industrial customers throughout Brazil. Currently, Petrobras has a sales network of more than 7,000 retail service stations in Brazil, all under the BR' brand. The company's retail network accounts for approximately 20% of the total number of service stations in Brazil.

Gas and Power: The Gas and Power' segment is engaged in gas transmission and distribution, electric power generation using natural gas and renewable energy sources and biofuels operations in Brazil. Petrobras has a total of 7,028 megawatts (MW) of installed capacity. The company's natural gas transportation assets comprise more than 9,000 miles of gas pipelines, including the Brazilian side of the Bolivia-Brazil pipeline.

Biofuels: The unit deals with renewable energy programs, including biodiesel, agricultural supplies, vegetable oil extraction and ethanol. Petrobras provides for more than 10% of Brazil's biodiesel and also acts as a market catalyst by securing and blending biodiesel supplies and providing these to smaller distributors in addition to the company's own service stations. Additionally, Petrobras is an active player in the growing ethanol industry through production, transportation, distribution, wholesale and export, and by stimulating improvements in product quality.

International: This segment includes all of the company's activities outside Brazil, including exploration and production, refining, distribution, and natural gas and power. Petrobras has operations in a number of different countries outside Brazil, primarily in South America, the U.S., Gulf of Mexico, and West Africa.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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