Petrobras Sinks on Currency Woes

Brazil's state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Analyst Report) announced second quarter loss of R$1.3 billion or R$0.11 per share, compared with earnings of R$10.9 billion or R$0.84 in the year-earlier quarter. Loss per ADR came in at 10 cents (1 ADR = 2 shares), contrary to the Zacks Consensus Estimate of 33 cents in profit. During the corresponding period last year, Petrobras earned $1.06 per ADR.

Petrobras’ net operating revenues of $34.7 billion were down 9.4% from the second quarter 2011 level.

The company’s results were dragged down by a weak domestic currency, rising costs and heavy fuel imports.

Segmental Performance

Upstream: Total oil and gas production during the second quarter of 2012 reached 2,579 thousand oil-equivalent barrels per day (MBOE/d), from 2,676 MBOE/d in the previous quarter and 2,607 MBOE/d in the same period of 2011.

Compared with the second quarter of 2011, Brazilian oil and natural gas production decreased 1.7% to 2,332 MBOE/d, while international production came in at 247 MBOE/d (as against 235 MBOE/d in the year-ago period).

During the second quarter of 2012, the average sales price of oil in Brazil fell 4.3% from the year-earlier period to $104.29 per barrel. Average sales price of international oil was up 2.6% year over year, reaching $93.48 per barrel. Regarding natural gas, average international sales price increased 32.8% from the second quarter of 2011, while domestic price was down 9.6%.

Exploration costs skyrocketed 184.9% to R$3.4 billion.

As a result of the counterbalancing effects of the abovementioned factors, the company’s upstream (or exploration & production) segment profit remained essentially flat at R$10.7 billion.

Downstream: During the second quarter, Petrobras’ downstream unit incurred a net loss of R$7.0 billion, much wider than the loss of R$2.3 billion a year ago. This was due to the company’s inability to shift the burden of rising oil costs to its consumers, as mandated by the state policy of keeping a lid on gasoline and diesel prices.

Though the company raised its wholesale fuel price in late June, it was not enough to offset Petrobras’ refining losses. Steep acquisition/transfer costs and higher product import cost – reflecting unfavorable currency movements – also hampered results.

Refining costs per barrel in Brazil were down 28.7% to $3.91. Internationally, it decreased 32.6% to $3.84. Petrobras exported an average of 562,000 barrels of oil per day, 19.0% lower compared to the same period last year.

Capital Spending & Balance Sheet

During the three months ended June 30, 2012, Petrobras’ capital investments totaled R$20.7 billion. At the end of the quarter, the company had cash and cash equivalents of R$26.3 billion and net debt of R$133.2 billion. Net debt-to-capitalization ratio was approximately 28%.

Rating & Recommendation

Petrobras – which aims to surpass Exxon Mobil Corporation (XOM - Analyst Report) by 2020 to become the world’s largest oil producer – currently retains a Zacks #3 Rank (short-term Hold rating). We are also maintaining our long-term Neutral recommendation on the ADR.