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Petrobras Abandons Argentine Asset Sale

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Brazil's state-run energy giant Petroleo Brasileiro S.A. or Petrobras (PBR - Free Report) has confirmed that it has pulled out of talks regarding the sale of some of its assets in neighboring Argentina. In an announcement, the company revealed that following a review, it has declined all offers from prospective purchasers without reaching any agreement.

Petrobras’ operations in Argentina include a refinery in Bahia Blanca, a number of gas pipelines, a fuel supply set-up, power generation units, in addition to oil/gas exploration and production assets.

The proposed Argentine property disposal was part of the company’s efforts to generate around $10 billion from selling assets to finance its huge investment requirements. Petrobras has embarked on an ambitious capital program during the years 2013 to 2017, totaling a massive $236.7 billion.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. 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.

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.

Additionally, we expect the company 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. Further, with the Brazilian government allowing Petrobras to raise fuel prices, investors can expect the company to boost its margins and improve cash flows in the near future.

However, we remain concerned by the company’s declining production trend. The huge investment requirements and the possibility of heightened state interference add to the negative sentiment.

This accounts for Petrobras’ current Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at Newpark Resources Inc. (NR - Free Report) , Exterran Partners L.P. and Dawson Geophysical Co. (DWSN - Free Report) as good buying opportunities. These energy equipment service providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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