Not financial advice, full disclaimer available here.
Oil is a strategic attribute for energy companies because it’s a global commodity without a ready substitute. The demand is inelastic and growth is driven by developing countries, where most of the world’s population lives but consumption is relatively low. The supply side of the market is supported by a group of exporting nations (OPEC+) who have an interest in keeping prices high.
Brazil’s national oil company, known as Petrobras, is a pure play on oil. It’s a geographic advantage the company has over its competitors, who depend more on natural gas as an earnings driver.
Nat gas is a more segmented market than oil with predominantly regional pricing. While the global LNG market is growing significantly, the supply of gas is less of a challenge than its transport. The demand is notoriously difficult to forecast because it’s subject to weather conditions. Nat gas also competes with other fuel sources for power and heating needs, including coal and nuclear.
The chart below breaks down the reserves of 10 integrated majors between oil and natural gas.1 Companies are ranked based on the size of their oil reserves, left being highest and right being lowest.
Petrobras actually has more oil reserves than Exxon if we exclude oil sands (see footnotes). The Brazilian company’s oil weighting is rare. The production mix is similar with 80% of volumes coming from oil versus ~50% for other firms, with the exception of Suncor. Here is the oil output for 2022.2
Petrobras is currently the biggest oil producer, although Exxon is a much larger company. The sheer size of the operation does not necessarily mean the assets are attractive, though.
To get an idea of value, we can look at the standardized measure of discounted future net cash flows (DCF), which is calculated in accordance with SEC and FASB requirements, and divide that metric by the number of oil-equivalent barrels in reserves. This variable is shown on the vertical axis in the chart below.
The higher the dot, the more valuable the reserves assets. Chevron ranks first and Petrobras is a close second. The average is about $15/boe and PBR is north of $18/boe.
The horizontal axis displays the price paid by investors for reserves in the stock market. Left is cheap and right is more pricy; so Petrobras is the cheapest stock. This variable is calculated by dividing the DCF value by the market cap of the company.3 A ratio below 1 means that the stock is trading at a discount, Equinor is trading at par.
Looking at price and value together, the upper left quadrant is the best and the lower right quadrant is the worst. Petrobras’ reserves assets are indeed attractive. The stock can appeal to energy investors, as well as yield and emerging-market investors.
Reserves data are based on US reporting standards (10K, 20F and 40F). Details:
Petrobras’ reserves position:
Source: 20F form (2022) Exxon’s oil reserves include 2.4bn barrels from oil sands. Gas reserves include 1.5bn barrels from natural gas liquids (NGL).
Suncor is a different type of oil producer. The Canadian company extracts oil from deposits of bitumen — a heavy, thick and sticky form of crude oil which requires special treatment facilities for processing. Oil sands are capital-intensive and costly but the reserves are huge.
Total’s reserves mix is based on page 253 of the 20F form which includes NGL in gas reserves. Other sections (page 562) seem to include NGL in oil reserves.
Chevron’s gas reserves include over 1bn barrels from NGL.
Shell’s oil reserves include NGL.
BP’s gas reserves include NGL.
ENI’s proved reserves of NGL are immaterial.
Equinor’s gas reserves include NGL.
Occidental’s gas reserves include 846m barrels of NGL.
Oil production graph details:
Shell includes NGL
Equinor includes NGL
For consistency reasons, market cap calculations are based on the diluted weighted-average number of shares at 31 December 2022. For Occidental, the market cap includes ~$9.7bn of preferred equity at book value. OXY also has warrants outstanding.
Cashtags: PBR 0.00%↑ ; XOM 0.00%↑ ; SU 0.00%↑ ; TTE 0.00%↑ ; CVX 0.00%↑ ; SHEL 0.00%↑ ; BP 0.00%↑ ; EQNR 0.00%↑ ; E 0.00%↑ ; OXY 0.00%↑
Thank You for your work
Read SLB Q1 transcript! Bullish PBR lots of Brazil color there