Brazilian energy giant Petrobras (NYSE:PBR) has vast potential to produce oil and gas in an area off the coast of Brazil that is known as the pre-salt region. If it delivers on its ambitious growth targets during the next decade, Petrobras will likely become the largest public energy firm in the world. Below are further details on its expansion plans and what this could mean for investors.
Petrobras recently provided a strategic business plan covering 2010 through 2014 and projections for its operations over the next decade. By 2020, it estimated that global oil supply will need an additional 43 million to 48 million barrels of oil per day to make up for higher demand and a decline in existing reserves throughout the world.
By 2014, Petrobras anticipates producing 3.9 million barrels of oil and natural gas equivalents per day and further ramping to 5.4 million barrels by 2020, up from about 2.6 million barrels it produced in 2010. Between 2012 and 2016, it estimates it will be the largest producer in the world by overtaking Royal Dutch Shell PLC (NYSE:RDS.A), Exxon Mobil (NYSE:XOM) and then BP PLC (NYSE:BP). Petrobras is already matching Chevron (NYSE:CVX) in terms of overall production.
Ramping up production to such a scale will require a corresponding jump in capital spending. Management anticipates spending $224 billion to explore and produce the vast estimated reserves in the pre-salt region. Capital expenditure will spread over an estimated 686 projects that will vary from identifying drilling opportunities to implementing the actual drilling operations. It projects generating $155 billion in cash flow between 2010 and 2014 as it continues to ramp production through 2020, using available cash on hand, and tapping debt and equity markets for $96 billion to meet these vast capital spending requirements. Despite what looks like a need for high debt levels, management doesn't anticipate pushing the total debt-to-capital ratio beyond 35%.
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The effort to tap current estimated reserves of more than 12 billion barrels of oil equivalent is certainly ambitious, but Petrobras has been operating at a break-neck pace for more than a decade now. Over the past 10 years, sales have grown at 20% annually while profits have jumped more than 40% on average over this period. Earnings growth has slowed a bit over the past five years, but both sales and earnings have averaged 26% over this time frame.
Doubling production by 2020 suggests that growth can continue in the double digits for many years to come. At a trailing P/E of less than eight, the valuation looks quite reasonable given the rapid growth management anticipates as it fulfills its ambition to become the largest publicly-traded energy firm in the world. If it can execute, investors should profit handsomely over the next decade.
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