Energy / Oil & Gas / Brazil
NYSE - PBR, PBR.A
Current Rating - BUY (09/04/2023) [Price PBR - 10.69, PBRA - 9.51]
Petróleo Brasileiro S.A. (better known as Petrobras) is one of the world’s largest producers of oil and gas and one of the largest companies in Latin America. The company primarily deals in exploration & production, refining, energy generation, and energy trading.
Petrobras operates and produces most of Brazil’s oil and gas and has very large reserves to support its production. These reserves are predominantly based off the coast of the southeastern end of Brazil in the Campos and Santos basins.
The company considers its business in three separate segments:
Exploration & Production;
Refining, Transport & Marketing;
Gas & Power.
In Brazil, the state is the owner of oil deposits. Companies are allowed to explore and extract these deposits as long as the state receives payment, typically in the form of royalties. The state carries out bidding rounds to offer the exploration rights to companies. Generally, firms will team up with other oil companies in consortia to bid for exploration blocks. These partnerships mean companies can bid for larger blocks and keep their exploration portfolios diversified by having interests in many exploration blocks rather than a few of them.
This diversification is important since blocks vary in how productive they are and having interests in a broad range of projects increases the chance of finding those which are most productive. In the oil exploration business, it’s important not to put all your exp(loration) in one basket.
For example, in 2022 Petrobras acquired rights to three further blocks across the Campos and Santos basins. Petrobras bid for these blocks in a consortium with other important oil companies: TotalEnergies, Petronas and Qatar Petroleum. Petrobras owns 30% of the rights while the other three firms own 30%, 20% and 20% respectively.
During 2022 Petrobras had 68 exploratory blocks covering close to 40,000 square kilometres in total area and drilled 7 new wells.
After the exploration stage comes the production stage. Once a block has been explored for oil and deemed viable from a commercial perspective, production can begin. This is when platform installation, drilling and well completion begins. After this, oil can begin being extracted.
In 2022, the total production of oil and gas (including natural gas liquids) was 2,684 thousands of barrels of oil equivalent per day (mboed). This is a little lower than in previous years but production remains broadly stable and ahead of Petrobras’ production targets.
The company also operates most of the refineries in the country, with the majority of these operations based in the southeast, close to not only the two large Campos and Santos basins but also close to the country’s largest urban and industrial areas. Petrobras refines 70% of its total production itself across 11 refineries.
Most of Petrobras’ refining output is split across 6 different oil distillates which all serve different purposes and markets:
Diesel - predominantly used as fuel for vehicle engines;
Gasoline - predominantly used as fuel for vehicle engines;
Liquified Petroleum Gas (LPG) - predominantly used as fuel for heating appliances;
Jet Fuel - predominantly used as fuel for aircraft;
Fuel Oil - predominantly used as fuel for industrial purposes such as in metallurgy and electricity generation;
Naphtha - predominantly used as raw material in the petrochemical sector.
Petrobras is majority owned by the Brazilian state, with their ownership at just over 50% of the common shares, as such, the state plays a big role in the company and is a significant beneficiary. Not only does the state pick up tax revenue from Petrobras but also any dividends the company issues. For the next five years, the company intends to return between USD215 - 235 billion to the state, of which USD195 - 205 billion in taxes and between USD20 - 30 billion in dividends.