Why Investors Love Petrobras

By Eric Fox | September 27, 2010 AAA

Petrobras (NYSE:PBR) raised a large amount of equity capital as investors crowded into this Brazilian oil and gas play, attracted by the growth that other major oil companies don't have.

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Petróleo Brasileiro S.A. or Petrobras as the company is known informally, is a Brazilian oil and gas company that is partially owned by the government of Brazil. The company just completed an offering of 1.87 billion preferred shares and 2.4 billion common shares, raising $70 billion. This was a record and will help fund the company's $224 billion capital plan through 2014.

Business Plan
The Petrobras business plan involves spending $224 billion over five years to grow the company's capacity to produce oil and gas. This capital plan is based on the generally accepted macro view that due to decline rates in existing oil fields, an enormous amount of reserves must be found and converted to production to meet future demand.

The company estimates that by 2020, between 43 and 48 million barrels of oil per day of new capacity must be found. Over the next twenty years, 65 to 78 million barrels of oil per day is needed to meet anticipated demand. This demand will be coming mostly from the developing world.

If Petrobras is successful in achieving its business plan, the company's production will reach 3.9 million barrels of oil equivalent (BOE) per day by 2014, with a further goal of 5.4 million BOE per day by 2020.

The cost for Petrobras to achieve this production growth is $119 billion over five years, with the balance of the $224 billion devoted to downstream, petrochemicals and other parts of the company's operations. Almost all this money will be spent on oil and gas exploration and development in Brazil, with only 5% targeting international properties.

This spending will obviously provide a boost to the Brazilian economy, as Petrobras expects suppliers based in Brazil to provide 67% of the total needs of the projects over the next five years.

E & P Projects
Petrobras estimates that its production in 2010 will total 2.7 million BOE per day, and will rise to 3.9 million BOE by 2014. This 1.2 million BOE increase will be composed of a 900,000 BOE per day increase in oil production, and a 300,000 BOE per day increase in natural gas production.

One area that will get billions in spending is the Tupi Field located in the Santos Basin offshore Brazil. A pilot project is to start up in 2010 and is expected to produce 100,000 barrels per day of oil.

Other companies drilling in offshore Brazil include Royal Dutch Shell (NYSE:RDS.A, RDS.B), which started drilling a well in August 2010. Total SA (NYSE:TOT) also owns 20% of the block where Shell is drilling. Another large operator in Brazil is BG Group (NYSE:BG), which has interests in six offshore blocks, and made the first discovery at the Tupi Field.

The Bottom Line
Petrobras raised a record amount of capital to help fund its ambitious business plan over the next five years. These funds will be used to develop the large oil and gas assets located offshore, and help supply expected future demand for oil and gas. (For related reading, take a look at the Oil And Gas Industry Primer.)

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