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State-controlled energy company – Petroleo Brasileiro S.A. or Petrobras (PBR - Analyst Report) announced that it has encountered light hydrocarbons in the well – 1-BRSA-1083-SES (1-SES-167) – in Sergipe-Alagoas basin, off the northeastern coast of Brazil.

Located in ultra-deep water block SEAL-M-426, the well is commonly known as Farfan and was drilled to a depth of 8,923 feet. This block forms a part of the concession BM-SEAL-11. Petrobras controls 60% stake in the concession along with operating rights, while the remaining 40% is with IBV Brasil.

Petrobras performed electric log analysis and fluid sampling through cable tests to confirm the discovery of a hydrocarbon column of 144.3 feet. Most part of the column was made up of porous sandstones containing light hydrocarbons.

Petrobras plans to conduct extensive drilling activities in the above-mentioned area and put forward an Appraisal Plan (PAD) to the National Petroleum, Natural Gas and Biofuels Agency (ANP).

Prior to this, Petrobras, in October, 2011, discovered superior quality gas in 1-BRSA-851-SES (1-SES-158) well in Barra accumulation in the same basin. In late August 2012, Petrobras hit upon an oil and gas reserve in the Moita Bonita well.

Headquartered in Rio de Janeiro, Petrobras is a Brazilian energy behemoth, dominating the country’s energy sector. The company’s activities include: the exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and in the refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

Petrobras – 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) – currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

We also maintain a long-term Underperform recommendation on the stock, reflecting the company’s weak fundamentals and poor performance in the last few months. We further remain concerned by Petrobras’ huge investment requirements, the possibility of heightened state interference and caps on local fuel prices.

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