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Petrobras Strikes Oil Again

Zacks Equity Research

Brazilian oil giant Petroleo Brasileiro S.A. or Petrobras (PBR) has hit upon a low-quality heavy crude oil accumulation of 15-degree API in Espirito Santo Basin, offshore Brazil.

The well – commonly known as Grana Padano – was drilled in Concession BM-ES-24 (Block ES-M-661), 36.0 miles from the city of Vitoria, capital of the southeastern Brazilian state of Espirito Santo, in a water depth of 3,963.2 feet.

Petrobras, with a 70% interest, acts as the operator of the exploration block, while privately held firm IBV holds the remaining 30%.

The consortium intends to submit an evaluation plan to the National Agency of Petroleum, Natural Gas and Biofuel Agency (:ANP) and targets further drilling to estimate the total potential of the reservoirs.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil, dominating the country’s energy sector. The company operates in six segments: Exploration and Production, Refining, Transportation and Marketing, Distribution, Gas and Power, Biofuels and International.

We believe that continued demand growth in Brazil (expected to outperform developed countries in the next few years), together with all new investments and acquisitions, will fuel Petrobras’ medium-term earnings outlook. Additionally, we expect the company to benefit from its expertise in deep-water operations, its huge recent discoveries (which could double its resource base) and the growing domestic refined products market.

However, we remain on the sidelines given the company’s exposure to the volatile oil and gas fundamentals, which are expected to impact profitability. Moreover, Petrobras’ huge investment requirements, operational hindrances and international business risks also add to our negative sentiment.

We maintain a long-term Neutral recommendation on Petrobras. The stock, which operates with other global energy players such as ExxonMobil Corp. (XOM), PetroChina Co. Ltd. (PTR) and Royal Dutch Shell plc (RDS.A), currently, retains a Zacks #3 Rank that translates into a short-term Hold rating.

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