Who Will Benefit From Brazil's Pre-Salt Region?
Jeff is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the next 10 to 15 years, as Brazil looks to transform itself from energy importer to energy exporter this will create substantial opportunities for investment. Even though there will be many companies what will benefit from Brazil's transformation, government supported Petroleo Brasileiro, or Petrobas (NYSE: PBR), Diamond Offshore Drilling (NYSE: DO), and Halliburton (NYSE: HAL) are three companies poised to reap the rewards of this vast opportunity.
The transformation from energy importer to energy exporter will make Brazil the largest producer of crude oil in Latin America. One vast region that the Brazilian government is looking to develop is the Pre-Salt region off the Southeast coast of Brazil. According to the EIA, this Ultra-Deep water region has ”recoverable oil and natural gas reserves at more than 50 billion barrels of oil equivalent (BOE)."
Petrobas is a company that operates as an integrated oil and gas company in Brazil. Petrobas, who is 54% owned by the Brazilian government, is planning to invest US $53.4 billion in the Pre-salt reserves by 2015. Aided by high growth demands and massive potential in the Pre-Salt region, Petrobas expects production levels to increase to more than 1 million bpd by 2017 and 2.1 million bpd by 2020.
As the chart to above indicates, Petrobas is also expecting oil production to increase substantially over the next seven years. They are looking for oil production to increase from 1,908 kbpd in 2012 to an estimated 4,200 kbpd by 2020 which represents an increase of 120%. As the chart indicates most of the increase in oil production will occur from gains in the Deep-water and the Ultra-deep water regions off the coast of Brazil.
As the depth of the Pre-Salt region is very deep (between 5,000 and 7,000 meters) and is challenging to access, this is presenting opportunities and unparalleled challenges for drilling service companies. Halliburton is a drilling service company on the leading edge of the Brazilian front. To help develop these fields, Halliburton has recently opened a Technology Center in Rio De Janeiro. Tim Probert, president of Strategy and Corporate Development for Halliburton stated, “This state-of-the-art center in Brazil, which is close to our customers, allows us to accelerate new technology development and enable Halliburton to deliver even more innovative solutions to our customers faster”.
Halliburton’s growth in Latin America has been evident over the past couple of years. When comparing Q1 and Q2 revenues for 2013 to Q1 and Q2 revenues for 2011 and 2012, the growth in Latin America is very evident. In the first half of 2011, Halliburton’s Latin American revenues were $1.299 billion. In 2012, Halliburton’s Latin American revenues increased to $1.659 billion while in 2013 the company reported 1st half yearly earnings in Latin America at $1.889 billion. This represents an increase of 45.42% over the past three years.
Diamond Offshore Drilling is an offshore drilling company that has been producing a negative trend regarding its profitability over the past few years. The main reason for its declining profitability is that they have the oldest fleet amongst its competitors. New opportunities in the Brazilian Ultra-Deep Water will allow Diamond Offshore to capitalize on their long-term strategy to upgrade their existing assets and purchase new assets that will improve the company's lagging profitability.
For Diamond Offshore Drilling, Brazil is a very important factor to its overall business. From 2010 to 2012 the percentage of Brazilian revenues increased from 36.8% to 46.1%. Because of Diamond Offshore’s strong ties with Petrobras, Diamond Offshore yielded 33.3% of its total revenues from that company. Diamond Offshore, who is 50.4% owned by Loews, received 12.5% of the company's revenues from Brazilian company OGX Petroleo e Gas. The 12.5% earned through OGX Petroleo e Gas coupled with the 33.3% from Petrobas totals 45.8% of its 2012 revenues from these two Brazilian companies.
As Brazil is looking to develop its Pre-Salt region over the next 10 to 15 years, this will create outstanding opportunities for many companies. Three companies looking to reap the rewards of Brazil’s transformation are Petrobas, Halliburton and Diamond Offshore Drilling. As each of these companies will directly benefit from the Brazil's transformation, look for increases in earnings and revenues moving forward.
Jeff Williams has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!