Petrobras Plumbs the Depths

First-quarter results from Petrobras (NYSE: PBR  ) -- short for Petroleo Brasileiro S.A. -- demonstrate that the company is capable of posting solid production gains and delivering cash to the bottom line. With additional opportunities opening overseas, Petrobras will continue to be a growing power in world oil markets.

First-quarter results
Petrobras delivered solid results in the first quarter. Net income increased by 33% on an 18% increase in revenues. Net margins increased to 19% from 17%. Higher oil prices, growing production, and efficient operations drove the top and bottom lines.

To put the production numbers in perspective, oil, natural gas, and NGL volumes increased by 10%, compared to the first quarter of 2005. Contrast the Petrobras results to the production at several other international oil companies:

Company

Production Gain 1Q2006 vs 1Q2005

BP (NYSE: BP  )

(2%)

Total (NYSE: TOT  )

(4.8%)

Repsol (NYSE: RP  )

(2.6%)



These declines demonstrate the obstacles to international oil exploration. Production at BP was lower than last year because of lingering damage from the hurricanes. Part of the decline at Total was due to disruptions in Nigeria, and Repsol experienced strikes in Argentina.

The main driver of the production gains for Petrobras has been its deepwater fields in the Campos Basin. The company has only been developing this area since 1985, making this a relatively young oil-producing region. Because deepwater drilling technology allows exploration to expand to increasingly greater depths, the company continues to make new large discoveries. Domestic production increased by 14%, caused by production start-up at two new deepwater platforms. Internationally, production declined by 6%, thanks to natural declines in Angola and interruptions in the Gulf of Mexico due to lingering effects of the hurricanes.

Risks
South American politics are a concern, since populist leaders -- Hugo Chavez and Evo Morales -- are using oil and gas revenue to prop up their socialist agendas. Petrobras is now caught in the crossfire of the seizure of Bolivian gas fields. While Bolivian production is a small fraction of Petrobras' total revenue, it looks like Bolivia is going to strong-arm as much money out of the company as it can. Petrobras claims it has taken its position to the Bolivian courts, but I wouldn't be too hopeful about a positive outcome. It looks like Petrobras also doubts success; it's announced plans to accelerate development of Brazilian gas fields.

Another risk to be aware of is that Petrobras remains a "national champion" oil company, 30% owned by the Brazilian government. Thus the company is subject to currency fluctuations, political changes, and tax rulings in South America -- a situation that may not be easy for U.S. investors to monitor.

Final thoughts
Petrobras is sitting on some of the newest oil reserves in the world. Its deepwater developments are allowing it to increase production at a time when production in other regions is stagnating. Plus, the company is diversifying its operations by taking its deepwater production experience to other regions.

Potential investors should be aware of the risks involved with buying shares of a company that is heavily owned by a foreign government and reports earnings in a foreign currency. Plus, looking at the Petrobras chart, investors should ask themselves if they really need shares of a company that can swoon 20% in a week. If you can stomach the ride, shares have fallen back to what fellow Fool Stephen Simpson considered parity back in February. If the sell-off in the oil patch continues, Petrobras shares will start grabbing my interest below $75.

Related Foolishness:

One Fool who demands a margin of safety before buying is Philip Durell, the analyst forMotley Fool Inside Value. In constantly searching for discounted prices, Inside Value is beating the S&P 500 without the heart-stopping volatility that Petrobras investors have seen in the past weeks. Sign up today for a free trial.

Total is aMotley Fool Income Investorselection.

Fool contributor Robert Aronen has never seized his neighbor's gas fields and does not own any company mentioned. Please feel free to contact him with your comments.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 518185, ~/Articles/ArticleHandler.aspx, 12/18/2014 6:19:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement