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Thursday, May 01, 2008

Petrobas Stock on the Way Up

The biggest oil discovery in the Western hemisphere in three decades and speculation about the existence of an even larger deposit has turned Petroleo Brasileiro SA into the world's most expensive energy producer, at least in terms of its share price to profits ratio. Petrobras shares currently trade at 17.2 times profits after rallying 87 percent over the last year. (By way of comparison Petrobras's price-earnings ratio was 8.77 a year ago and under 5 back in June 2004).This makes Petrobas shares effectively twice as expensive as Russia's Lukoil and or the netherland's Royal Dutch Shell, and 50 percent more expensive than Exxon Mobil - which only this week announced that total output was down 10% in the first three months of 2008 when compared with a year earlier - as investors focus on the Rio de Janeiro-based company's oil finds rather than its falling profits. Lukoil trades at 7.77 while Royal Dutch Shell is at 7.6 times earnings. Irvine, Exxon's PE ratio is 11.60. The remainder of the world's 10 largest oil producers are also cheaper than Petrobras at this point.

Exxon’s overall oil and gas production fell 5.6 per cent from the year-earlier quarter. Production in Africa, a key new area of investment, fell 20 per cent as high oil prices and contract stipulations forced it to hand over more of its production to host country governments. Venezuela’s nationalisation of its oil fields also hurt the group’s volumes, as did declines at Canadian gas fields. Unlike Royal Dutch Shell, which is stressing its research in second generation biofuels, and is a leader in making natural gas into transport fuels, Exxon has long argued that traditional alternatives, such as wind power, have proved uneconomic. But it says it is researching future fuels that it is less ready to talk about publicly. The figures are likely to increase pressure from investors for Exxon to raise dividends. It devoted $8bn to buying back its own shares and $1.9bn to dividends while adding another $6.9bn to its now $40.9bn cash pile.

The Brazilian government's controlling stake in Petrobras may add to the stock's attraction on speculation the company will get favorable treatment in exploiting oil. President Luiz Inacio Lula da Silva's administration pulled 41 exploration licenses from an auction after Petrobras found the Tupi oil field Nov. 8, a discovery that caused the stock to jump 14 percent, the biggest rise in nine years. Tupi, 155 miles (250 kilometers) off Brazil's coast, may have 8 billion barrels of recoverable oil.

Petrobras shares rose another 5.6 percent on April 14 after the head of Brazil's oil agency said the offshore Carioca prospect may hold the equivalent of 33 billion barrels of crude, large enough to be the world's third-biggest field. Chief Executive Officer Jose Sergio Gabrielli said later Petrobras is still exploring to determine Caricoa's size.

The strong performance by Petrobas helped lead Brazil's Bovespa to a 6.3 percent jump on April 30, making it the world's best-performing equity index this year among the 20 biggest markets, after Standard & Poor's assigned the country an investment grade credit rating. Brazilian markets were closed yesterday for a holiday.

Petrobras, now the world's ninth-biggest company, with a market value of $248.3 billion, is still half the size of Exxon, the largest oil producer. However Petrobas's valuation surpassed PetroChina's last November - after shares of the Beijing-based oil company posted their biggest monthly retreat ever.

Fourth-quarter profit at Petrobras declined about 3 percent as costs increased faster than sales. The company produced an average 2.34 million barrels of oil, natural gas and natural-gas liquids a day in March, down from 2.35 million barrels a day the month before.

However Brazil's biggest company by market value looks less expensive when viewed relative to the oil it owns. Petrobras trades for the equivalent of 34.91 reais (or $20.58) per barrel of proven reserves. That's cheaper than Exxon's $22.19 a barrel and Royal Dutch Shell's $23.80 per barrel of oil equivalent in reserve. Under this measure, Petrobras is still more expensive than BP and Lukoil, which fetch $14.75 and $4.71 a barrel.

It should not be forgotten however that pumping oil from the most recent Brazilian discoveries, parts of which are 32,000 feet (9,800 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest offshore well. So there are tachnological issues to take into account here. But still, once these are resolved (assuming they are) Petrobas seems to have its hands on rather a lot of oil at just the time when global demand seems set to rise and rise.

1 comment:

Anonymous said...

Good post.

Having been long on Brazil for about 2 years (via EWZ) and PBR for about 9 months, I can say that I've been very pleased with the performance of the Brazil sector. However, any Dollar strength could lead to a significant unwinding, as oil would fall, and the Real would also fall, creating a double-whammy for any US holder of Brazilian equities.