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Petrobras Hits Oil in Santos Basin

Zacks Equity Research

Brazilian state-run energy giant, Petroleo Brasileiro S.A. or Petrobras (PBR), announced that it has discovered a new oil deposit at the pre-salt Carioca Discovery Evaluation Plan area, in the Santos Basin.

The new well is at a water depth of 2,158 meters and is located 303 kilometers off the coast of Sao Paulo. The lower valued, heavy crude oil was discovered through oil samples of 20° API (American Petroleum Institute).

Petrobras has a 45% operating interest in block BM-S-9 (where the discovery was made), with the other partners being U.K’s BG Group and Repsol Sinopec Brasil – a collaboration between Spain’s Repsol S.A. (REPYY) and Chinese refining giant Sinopec (SNP).

The oil enriched Santos Basin, where the company has several other projects, is a promising exploration area.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company’s activities include exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

We expect Petrobras’ earnings to be in-line with Zacks Consensus Estimate of 52 cents when it announces the second quarter results on Aug 9, 2013. The company’s diversified asset portfolio and new discoveries make us hopeful of good results. Its international presence is also expected to lend support to its earnings. The decision by the Brazilian government to allow Petrobras to raise diesel price is expected to not only boost the company’s margins but also cut losses.

However, dampening the positives are high technological and exploration costs associated with the company’s new discoveries. Also, other macro factors such as commodity price and currency fluctuations are expected to negatively impact Petrobras.

Considering the above factors we maintain a Zacks Rank #3 (Hold) for Petrobras, implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can also look at Cabot Oil & Gas Corp (COG) as good buying opportunity. It currently holds a Zacks Rank #1(Strong Buy).

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