Petrobras Finally Shows Positive Results With Strong Growth Prospects

Players and Shareholders in the E&P Sector Turn Their Eyes to Petrobras Due to Its Recovery Capacity and So Many Production Systems Installed in Such a Short Time

A Petrobras has finally announced a positive annual result, five years after the crisis left the Brazilian state-owned company with mounting debts. The company ended the year with a net profit of US $ 25.8 billion, the highest figure in seven years, and a total of R $ 20.2 billion (US $ 5.27 billion) in asset sales. The higher oil prices largely contributed to the strong year. Oil jumped 50% year-on-year. Even a slight decline in production did not impact the company’s finances – production fell to 2.63 million barrels per day, down from a record 2.65 million barrels/day the previous year.

Production is expected to increase again this year and further boost the company’s bottom line. Four new production systems were installed in 2018 – P-74, the floating production, storage, and offloading (FPSO) Cidade de Campos, P-75 in Búzios, and P-69 in Lula Extremo Sul – and this year Petrobras is seeking another four in the pre-salt and deep-water regions.

Gabriel Fonseca, equity research lead analyst at the Brazilian brokerage XPI, says that “there is room for 10% production growth in 2019.”

The P-67 was the first platform to be completed this year, in Lula Norte, in the Santos Basin. The FPSO has the capacity to process 150,000 liters of oil and 6 million m3 of natural gas. The platform is located in the Lula field, which is Brazil’s most productive, with 900,000 barrels per day, and is expected to reach 1 million barrels per day in 2019.

Two other platforms with the same capacity have also begun producing. The P-76 in Búzios, the second most productive field in the country, started production in February, followed by the P-77, also in Búzios, in the pre-salt of the Santos Basin. Petrobras plans to add another production system in 2020, followed by three in 2021 and another three in 2022.

The startup of these facilities will allow Petrobras to increase production, but at a lower cost. According to UBS, in the first quarter of 2018, lifting costs fell by 7% compared to the average cost of the previous year. Currently, pre-salt production has a lifting cost of around US $ 7/bl, including a production system leasing cost of US $ 2/bl. In contrast, post-salt basins have an average cost of US $ 10-11/bl. The breakeven cost of deepwater projects has also fallen to US $ 29/bl.

There are some concerns, however, that Petrobras will struggle to meet its production targets in the coming years. “Production shortfalls are a significant risk factor for 2019 and beyond,” says Muhammed Ghulam, senior associate at the U.S. investment bank Raymond James. The production target for 2023, which corresponds to an annualized growth rate of 6% over the 2018 baseline, is quite aggressive compared to the 3-4% range we anticipate.

The next priority for the government is to resolve the Transfer of Rights dispute with Petrobras so that Brazil can launch the surplus volume auction by the end of the year.

Bradesco expects that, after an extended period of negotiations with the government, Petrobras will conclude negotiations as a net creditor, and by April there should be a resolution; the issue is the government needing to reimburse Petrobras US $ 8 billion. The auction is already scheduled for October 28.