Zacks: New Reserves for Petrobras
We keep our Buy recommendation on Petroleo Brasileiro SA (Petrobras) (NYSE: PBR) on the Brazilian state oil company's positive production-growth profile and the improving outlook for its downstream business. The recent discovery of the Tupi field opens up a new range of possibilities for the company in the long run.
Moreover, the continued high price of oil and the company's large inventory of development projects are also positive. Finally, Petrobras' first quarter results were better than expected, and the outlook for the following quarters remains encouraging.
Most of Petrobras' domestic operations are located in the offshore Campos Basin, which is Brazil's largest oil region and is one of the most prolific oil and gas areas in South America. Even without considering some important new discoveries, the company is expected to grow annual volumes by about 6 percent over the next few years. The company has laid out a realistic, but aggressive, plan to grow production volumes over the next few years by competitively developing its extensive, proved undeveloped reserve base in the Campos Basin and in select international markets, using its considerable expertise in deepwater oil exploration.
Until recent quarters, PBR used to trade at a discount due to the difficult political environment in Latin America. However, after the discovery of the new oil field at Tupi, with a reserve potential of over 60 billion BOE [barrels of oil equivalent], PBR trades at 19.7x our 2008 earnings estimate, at a considerable premium over the industry mean of 11.4x.
In the near term, the stock should benefit from the positive outlook for the domestic oil industry and the recent upgrade of Brazil to investment grade by S&P. We expect PBR's P/E multiple to expand to around 21.5x our 2008 earnings and set a target price of $79.50 on the stock.