Better Q4 profit and falling debt
Petrobras is a Brazil based holding company which engages in the exploration, production, refining and sale of crude oil and other energy sources. It reported a fourth-quarter net of 7.75 billion Brazilian Reals or $3.89 billion, which is a jump of 53% from the year-ago quarter. The profit was above estimates and mainly due to the sale of government bonds issued by the company offsetting the losses in the refining division. Total debt stands at around $96 billion, 4 times its 2008 level, which exposes the company to a possible rating downgrade. However, the company is planning to sell some assets of around $10 billion by 2017 which will generate some cash, thus reducing debt.
Why Petrobras faced losses in its refinery division
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) had the potential to become Brazil’s net exporter of oil. It witnessed a strong demand of fuel which it imports at world prices and sells below cost. This was because the prices are highly subsidized by the Brazilian government which led to huge losses in its refinery division. The losses occurred in spite of the significant revenue it accumulated by the increase in domestic gasoline and diesel prices. Petrobras fell short of domestic crude oil production because of lower recovery rates, as well as maintenance shutdowns at aging platforms.
Huge investments lining up
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) plans to continue expanding its domestic refining and distribution operations. According to CEO Maria das Gracas Foster, Petrobras expects to start crude oil production at its Cidade de Paraty FPSO at the new deep-water Lula Nordeste field in Brazil’s offshore subsalt in May. Also, the company reportedly is in partnership talks with Eike’s Batista’s LLX Logistica that could lead to signing up for a berth in the Acu Port project. Production from the Lula Nordeste field would yield 300,000 barrels.
In addition to this, 6 new platforms will enter production in 2013, and the output from them is expected to increase in the second half of this year. It is set to reach 1 million barrels a day by 2017. Petrobras also has plans to double Brazil’s natural gas supply by 2020. The domestic demand for fuels in Brazil are set to grow at an average 4% every year which will help Petrobras in meeting its revenue targets.
Competitors
Petrobras is the biggest government owned oil company in Brazil and faces little competition in its home country. This is due to the preferential treatment given to it by the Brazilian government. However, there remain competitors like ConocoPhillips (NYSE:COP) and TOTAL S.A. (ADR) (NYSE:TOT).
ConocoPhillips is a global integrated company with assets in North America, Asia, Europe and Australia. It is not concentrated in one country like Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The P/E ratio of ConocoPhillips (NYSE:COP) is around 11, which is almost equal to the industry average. It is an energy company with a fairly high yield, and might be a safe pick for income investors. If I look at the stock price of the two companies over the past 3 months, ConocoPhillips (NYSE:COP) has performed better than Petrobras and closer to the benchmark S&P 500 index.
TOTAL S.A. (ADR) (NYSE:TOT) is a France-based integrated oil and gas company with a low forward P/E. It offers steady income and has a lower volatility with an attractive dividend yield of 5.70%. The growth opportunities are minimal for Total. It is looking forward to grow its future hydrocarbon production but does not have any significant investment plans like Petrobras. So I would rate Petrobras ahead of Total for a growth investor.
The bottom line
Petrobras is one of the top 3 most valued brands in Brazil. The stock looks cheap, trading around 7 times its 2013 forecast earnings. Recent domestic fuel price increases bring a sigh of relief for Petrobras. The weakness in international crude and fuel prices combined with a stronger domestic currency are helping Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) to narrow its losses. If the company can efficiently execute its plans and step up production, it will bring them significant dollars of revenue. This will in turn reduce the levels of debt on its balance sheet. The future investments will surely generate a lot of returns. For all these reasons I believe the company has a lot of potential which makes the stock a profitable long term investment.
The article Petrobras: A Profitable Long Term Investment originally appeared on Fool.com and is written by Sujata Dutta.
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