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Brazil's state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Analyst Report), announced third quarter profit of $1,484.0 million, significantly lower than the $2,744.0 million earned in the year-earlier quarter. Earnings per ADR came in at 22 cents (1 ADR = 2 shares), as against the year-ago profit of 42 cents. The company’s per ADR profits also came sharply lower than the Zacks Consensus Estimate of 45 cents.

The deterioration could be attributed to stagnant production, jump in exploration expenses and high domestic fuel demand that were imported at higher prices.

Petrobras’ net operating revenues of $33,955.0 million were below the year-earlier level of $36,374.0 million.

Segmental Performance

Upstream: Petrobras’ total oil and gas production during the third quarter reached 2,522 thousand barrels per day (MBbl/d), flat from the year-ago period.

Compared with the Jul-Sep quarter of 2012, the company’s Brazilian oil and natural gas production increased 1.5% to 2,314 MBbl/d, while international production came in at 208 MBbl/d (as against 242 MBbl/d in the corresponding period last year).

During the third quarter of 2013, the average sales price of oil in Brazil decreased 2.9% from the year-earlier period to $98.87 per barrel. Average sales price of international oil was down 4.9% year over year, to $85.97 per barrel. Regarding natural gas, average international sales price increased 5.3% from the third quarter of 2012, while domestic price was down 2.9%.

Exploration costs skyrocketed 52.0% to $968.0 million.

These factors pushed down the upstream (or exploration & production) segment profit by 4.7% to $7,695.0 million.

Lifting cost per barrel (or cost to produce each barrel of oil) moved down 1.8% in Brazil to $14.96, but overseas costs rose 7.3% to $9.73.

Downstream: During the third quarter, Petrobras’ downstream unit incurred a net loss of $3,755.0 million, narrower than the loss of $4,266.0 million a year ago. Petrobras was able to cut its losses on account of the recent decision by the Brazilian government to allow it to raise diesel and gasoline prices. This has helped Petrobras to shift some of the burden of rising costs to its consumers.

Refining costs per barrel in Brazil were down by 6.9% to $3.26. Internationally, it increased 3.2% to $4.26. Petrobras imported an average of 827,000 MBbl/d, marginally higher (by 0.6%) compared to the same period last year. In particular, oil product imports were 12.8% more than the year-earlier period, adversely impacting gross margins.

Capital Spending & Balance Sheet

During the three months ended Sep 30, 2013, Petrobras’ capital investments and expenditures totaled $10,991.0 million. At the end of the quarter, the company had cash and cash equivalents of $17,646.0 million and net debt of $86,542.0 million. Net debt-to-capitalization ratio was approximately 36%.

Zacks Rank & Stock Picks

Petrobras currently retains a Zacks Rank #2 (Buy), implying that it is expected to outperform the broader U.S. equity market over the next one to three months

Apart from Petrobras, one can also look at Matador Resources Co. (MTDR - Snapshot Report), Linn Energy LLC (LINE - Snapshot Report) and Northern Oil & Gas Inc. (NOG - Snapshot Report) as good buying opportunities. These domestic upstream energy operators – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.
 

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