Petrobras Digs Deep in Carcara Well

State-controlled energy company Petroleo Brasileiro S.A. or Petrobras (PBR - Analyst Report) announced the presence of more oil in the Carcara prospect in the ultra deep waters of Santos Basin. The well is located about 144.1 miles off the coast of Sao Paulo State and at a water depth of 6,650.3 feet in the pre-salt region.

The discovery of oil in the well -- SPS-86B (4-BRSA-971-SPS), unofficially known as Carcara, in block BM-S-8 -- was first announced in mid-March. Since then, Petrobras continued drilling the well to a depth of 20,384 feet to determine the total thickness of the oil reservoirs as well as to seek for deeper liquid.

The exploration has resulted in revealing a 1312 feet deep oil column and oil with API gravity of 31 degrees. Evaluation also shows that the connected carbonate reservoirs are of superior porosity and permeability.

Petrobras acts as the operator of the block with a 66% interest. Petrogal Brasil, Barra Energia do Brasil Petroleo e Gas Ltda. and Queiroz Galvao Exploracao e Producao S.A. hold a respective interest of 14%, 10% and 10%.

As per the Evaluation Plan approved by the Oil, Natural Gas and Biofuels National Agency, the consortium will consistently conduct activities and investments required for the assessment of the area.

We are maintaining a long-term Neutral recommendation on the stock. We believe that continued demand growth in Brazil (expected to outperform developed countries in the next few years), together with all the new investments and acquisitions, will fuel Petrobras’ medium-term earnings outlook.

Petrobras – which is the fourth biggest company by market capitalization after ExxonMobil Corp. (XOM - Analyst Report), Royal Dutch Shell plc (RDS.A - Analyst Report) and Chevron Corporation (CVX - Analyst Report) – stands 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 are concerned about investor skepticism regarding the company’s huge investment requirements, as well as the possibility of heightened state interference and earnings dilution following the $70 billion share sale.