Brazil's state-run energy giant Petroleo Brasileiro S.A. or Petrobras (PBR - Free Report) awarded a $2.7 billion contract to Sapura Nevegacao Maritima, a joint venture between Norwegian oilfield service firm Seadrill Limited (SDRL - Free Report) and Malaysia-based SapuraKencana.
Per the deal, the joint venture will build and charter three flexible deep water pipe laying support vessels and operate those for 8 years. Delivery is expected by the second quarter of 2016. Petrobras can extend the deal by additional 8 years.
Petrobras’ decision to construct vessels outside Brazil is in sync with its initiative of cutting costs by $15.4 billion over five years. Any increase in costs will adversely affect Petrobras’ ambitious investment program for the 2013-2017 period, 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 exploration, exploitation and production of oil from reservoir wells, shale and other rocks. Petrobras is also engaged in refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
Petrobras produces substantially all of Brazil’s crude oil and natural gas and accounts for almost all of the country’s refining capacity.
However, the Brazilian government, the company’s majority shareholder, has a history of political interference in Petrobras’ affairs. We do not expect this situation to change in the short to medium term. This may impact the company’s performance, since interests of the government might not coincide with those of minority shareholders.
Petrobras currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next 1 to 3 months.
Meanwhile, one can look at Ferrellgas Partners LP (FGP - Free Report) and Summit Midstream Partners LP (SMLP - Free Report) as good buying options. These energy stocks – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from the current levels.