Petrobras Deals with China

Last week, Petrobras (PBR - Analyst Report) announced it has signed two Memorandums of Understanding with Chinese institutions and an export oil contract with UNIPEC Asia Co. Ltd. -- a subsidiary of China Petrochemical Corporation, or SINOPEC (SNP - Analyst Report) -- to export around 100 thousand barrels of oil per day. The Memorandum between China Development Bank Corporation, SINOPEC and Petrobras presents has the followings details :

• Credit supply to Petrobras, including the option to off-set the debt with the export of oil, as per Chinese institution option and in a volume to be defined in the future;
• Increase the oil export of Petrobras to China;
• Partnerships between Petrobras and Chinese companies to develop projects in several oil industry segments;
• Supply of service, material and equipment by Chinese companies to Petrobras; and
• Promoting contacts between Chinese and Brazilian companies for the purpose of creating joint ventures.

The amount of the deal is estimated as US$10 Billion in loans for Petrobras in exchange of future oil exports. Indeed, Petrobras is in need of cash in order to continue its investment programs to develop the giant's oil field in the pre-salt basin.

That's positive news. However, due to the depressed levels of oil prices the huge reserves -- which are more than 5,000 meters below sea level, with very high exploration costs -- doesn't seem to be a great opportunity. We are keeping our Hold recommendation on Petrobras.