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Petrobras' Big Oil Find Brings Greater Costs, Shares Fall

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U.S.-listed shares of the Brazilian energy giant, Petroleo Brasileiro SA or Petrobras (PBR - Free Report) fell over 4% following the announcement that it will have to shell billions of Brazilian reais for additional production rights at its Buzios field and nearby areas.

Petrobras has discovered around four times the crude that it was authorized to produce as per its Transfer of rights agreement. Hence, the company will be required to pay 2 billion Brazilian reais in 2014 as advance payment for the expansion of production rights. It will have to pay an additional 13 billion Brazilian reais in the next four years based on the anticipated yield.  

Production sharing agreements for the additional produce will come into effect from the date of first production from each of the four regions of Búzios, Entorno de Iara, Florim and Nordeste de Tupi. As per reports, production from this expansion is expected to begin in 2020 or 2021. Petrobras believes that considering the parameters set for this production rights expansion, the project will be as attractive as its ultra-deepwater oil prospect Libra field, located in the Santos Basin.

Petrobras plans to sell assets to make the advance payments. The company does not intend to seek partners for this venture. Last week, Petrobras mentioned that as per its Business and Management Plan, it intends to divest assets worth $5–$11 billion between 2014 and 2018.  

Though this discovery has substantial long-term potential for a company that has been trying to increase production, the costs associated with the find will likely raise Petrobras’ debt burden at the initial level, which is already quite high.

Petrobras currently has a 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 consider better-ranked players from the broader energy sector such as Statoil ASA (STO - Free Report) , QEP Resources, Inc. (QEP - Free Report) and Ultra Petroleum Corp. (UPL - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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