Over the last year Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s share price has moved like a rollercoaster, oscillating between a high of just over $20 per share and a low of just over $14 per share, to now be down by 15%. Despite the many problems that Petrobras has experienced, I believe that at its current price it represents significant value for long-term risk tolerant investors, and in this article I will explain why.
Why has Petrobras failed to perform for investors?
The key drivers of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) poor share price performance have been the company’s poor financial performance, declining production, lower crude prices and growing economic and political risk in Brazil. The Brazilian government, Petrobras’ majority owner, has also historically shown a preference for interfering in the company’s operations to the detriment of private investors.
For the first quarter 2013 Petrobras’ revenue remained flat in comparison to the previous quarter, but fell by 2% year on year to $36 billion. Net income also remained flat quarter over quarter, but fell by 26% to $3.8 billion year over year. The key driver of this poor performance was declining production, which quarter on quarter remained flat but fell by 5% to $2.6 billion year over year, coupled with lower crude oil prices.
Another significant driver of the company’s poor performance has been the need to import gasoline to meet government quotas, with that gasoline sold at a loss because of the government cap on fuel prices. But the Brazilian government increased the cap on gasoline prices by 7% and diesel by 5% in January 2013, with an additional 5% increase in diesel prices in March.
This has had a positive impact on Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s financial performance by helping to reduce the gap between domestic oil prices and international oil prices. As a result its downstream segment saw its losses for the first quarter fall by 18% year over year to $2.1 billion. This bodes well for Petrobras to be able to boost its profitability and continue to reduce losses in its downstream business.
Disappointingly, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s production has continued to fall on the back of stoppages and natural declines in existing wells, reiterating the need for the company to focus on expanding the production of its pre-salt operations. However, these are difficult reserves to reach due to the depth and complexity of drilling and then pumping the oil to the surface, making it clear that Petrobras will need external help in bringing its pre-salt fields to full production.
But the company was able to raise a record $11 billion in debt through a bond issuing in May 2013. This leaves the Petrobras with substantial cash on hand to fund its capex needs and bodes well for its ability to successfully exploit its existing resources and continue exploration. It is also expected that Petrobras will be able to significantly ramp up production in 2014, with the company having installed three new platforms already in 2013 and with another four to come on line through the remainder of the year. All of which bodes well for increased production and proven reserves.