Last Week, Petroleo Brasileiro SA or Petrobras (PBR) posted negative second-quarter results, which were in line with expectations due to the huge slump in oil prices in 2009 from the last year. Fall in oil price from $109 per barrel in the first half of 2008 to $52 per barrel in the first half of 2009 had a strong effect on the company. Moreover, greater volumes of financing, of commercial hedge operations and the impact of exchange rate on foreign assets also hurt quarterly results.

Net profit declined 20% to R$7.73 billion ($4.16 billion), down from R$9.72 billion in the second quarter of 2008. The company posted an EBITDA of R$17.51 billion compared to R$18.63 billion the year-ago period. However, oil and gas production in Brazil was up 6% year over year and 1% sequentially. This was due to new oil projects Incorporatedluding the Frade field, which is being developed with Chevron Corp. (CVX).

Total debt reached $35 billion, up 16% from the previous quarter, as Petrobras increased leverage to develop the massive offshore sub-salt fields. Debt is expected to rise further as the company plans to invest $174 billion in the underexplored Santos Basin Incorporatedluding the massive Tupi field, through 2013.

The fall in oil prices creates an extremely tough environment for the oil industry as a whole and for Petrobras in particular. Lower crude oil prices significantly reduced the company’s profitability and ability to fund expenses from its own resources in the near future. With drastic changes in the international economic environment, commodity producers like Petrobras were among the worst affected as their business is cyclical in nature.

Despite the current economic environment, we believe that the continuous increase in demand in Brazil coupled with the company’s new investments and acquisitions will fuel its earnings in the medium term.

Zacks Investment Research
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