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Petrobras: Great for Brazil, Not So Great for Shareholders

by: Otto Rock September 07, 2008 | about stocks: PBR    

Otto Rock

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Over the last couple of days I've been looking at Petrobras (PBR), and there are some conclusions we can draw from looking at one simple ratio chart.

First, though, the basic price chart. Here it is from 2007 to date...

click to enlarge

...and if I were of the technical analysis ilk, I would have drawn in all sorts of lines and arrows and channels and support points that have all been broken recently. I'm sure you can paint them in with your mind's eye anyway, so there's no laboring the point here. As it is, I've left the uber-basic 200-dma to guide.

But now comes a different chart that shows PBR in ratio to the WTI crude per barrel, and I've written a couple of observations straight onto the chart:

  • PBR was flavor of the year in 2007. In the investment world's perception it moved from relative obscurity to join the pantheon of big oil names, and we can see that on the chart the second half of 2007 saw PBR giving impressive leverage to WTI, its ratio moving from a low of 0.37 to a high of 0.62.
  • Then came a period when although PBR's share price still moved up, it was much more in lockstep with the rise in oil. It should be pointed out here that the high point of the PBR:WTI ratio came in February, while the share price peaked much later in mid-May when the Arjun-factor pushed WTI to $147/bbl.
  • Next, the May to July 2008 period was brutal, as the flipside of the 2007 leverage coin showed itself and PBR's ratio to WTI dropped sharply.
  • The final phase is the one we are in today, with PBR fairly range-bound compared to WTI. The word I use on the chart is "mature", as nowadays the public image of PBR is one of the big oil boys (be that correct or not).

Regulars to my blog will know that I never bought into the hype surrounding PBR, and there are plenty of previous posts that stand as evidence (when the hype machine was at full speed, this humble corner of cyberpace was even featured in the mighty London FT in this note that says "One blogger offers the response: short Petrobras.").

Now that PBR has blown off the hype and found a steadier ratio against WTI, I might take it a bit more seriously in the future. However, the Steve Jobs-like UPOD (under promise over deliver) style that Wall Street praises is turned on its head in Brazilian business. It's more like OPUD in their world, and the overexaggerated claims for Tupi, Carioca still need to be bumped down a few notches.

Up to just a couple of months ago, the image sold was one of PBR only having to stick a pipe into the seabed and out pours 30 squillion barrels of ready-processed lead free fuel. Sure the oil is there (nobody knows exactly how much, but hey...who's counting?) but op-ex will be high and cap-ex on this project will be simply enormous; we're talking in the hundreds of billions of dollars to get this thing rolling.

It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

So I'm still neutral on Petrobras stock. I'm reasonably bullish on the company and what it will do for Brazil in the long term future, but because shareholders are not the raison d'etre of PBR there's no reason why you or I should prefer it over CVX, COP, XOM or whatever other big oil strikes your fancy.

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This article has 35 comments:

  •  
    Sep 07 07:43 PM
    Thank you, Otto. PBR to WTI ratio was helpful. Note that Petrobras has shut in Tupi for the next 12-18 months, allegedly studying well data and waiting to acquire/process wide azimuth 3D seismic. Next market mover will be Exxon block 22.
    Reply
  •  
    Sep 08 08:50 AM
    Alan,

    If you don't mind, please comment further on Exxon Block 22. Is it a deepwater Gulf prospect? Wholly owned or shared?
    Reply
  •  
    Sep 08 08:56 AM
    Alan, you are correct. The next BIG news will be the Exxon/Hess well on Block BM-S-22. Hess stock should get the largest bounce because of its capitalization.
    Reply
  •  
    Sep 08 09:08 AM
    Thanx. Is the find oil or gas?
    Reply
  •  
    Sep 08 02:56 PM
    There is no "find" yet in BM-S-22. It is a tract in the center of the area with all the subsalt Brazilian finds, and should be the most prolific based on the geologic evidence, but the first well is scheduled to START drilling around Sept. 30 by Exxon. BM-S-22 is 40% Exxon, 40% Hess, and 20% Petrobras. It is unusual to see a non-operator do drilling, but Petrobras has announced they will also start a second well in BM-S-22 before the end of the year, when a drillship finishes another well in the region. Hess is perhaps an eighth of the market cap of Petrobras, and about a fifteenth of Exxon, so it would see a much greater benefit from a find there.
    Reply
  •  
    Sep 08 03:01 PM
    any comments re the 'new' company that the Gov´t is planning to launch to look after these new finds - this talk is also having a big negative impact on the stock price.........
    Reply
  •  
    Sep 08 03:49 PM
    So why not play RIG on the PBR finds??? If PBR's estimates are "OPUD" and they simply don't have the hyped volumes...or it proves too hard or costly to get to market...RIG already has a several year backlog with day rates that continue to rise. And if PBR's finds are as big as estimated and don't prove prohibitive to get out...the deep drillers are gonna be needed!

    Rather than dismiss a particular play entirely...look for the best angle on it. In this case, rather than holler "short PBR", the answer could well be "long RIG"!!

    Disclosure: I am already long RIG.
    Reply
  •  
    Sep 08 07:57 PM
    BM-S-22 data will be a market mover because it's being drilled, logged, cored, and tested by grown-ups.

    If time permits, I'll write something about RIG.
    Reply
  •  
    Sep 08 10:43 PM
    AvA, your comment about "grown-ups" is, well,... childish and offensive. Offensive because Brazil's fifteen sub-salt successes out of fifteen attempts FAILED to impress you, while one well soon to be sunk by Exxon will be a "market mover." Such arrogance. How do you justify that? I sure hope you are not a citizen of the USA since that obligates me to apologize for your rudeness and ignorance.
    Reply
  •  
    Sep 08 11:15 PM
    Okay -- regarding Transocean: great company, very little exposure to Brazil (thank goodness). They have more deepwater semisubmersible rigs deployed in India than in Brazil, and twice as many in West Africa. PBR plans to drill as cheaply as possible with Brazilian-built platforms and FPSOs.

    It was fun looking at Transocean's data. Their Sedco Express-class deepwater semisubmersible rigs are spectacular to behold. But they ain't going to Brazil. Way too expensive. GOM yes, NS maybe.
    Reply
  •  
    Sep 08 11:18 PM
    Kezorm - which 15 wells please?
    Reply
  •  
    Sep 09 12:25 AM
    I can assure you Transocean is well exposed to Brazil:

    money.aol.com/news/art...

    www.forbes.com/afxnews...

    www.bloggingstocks.com.../
    Reply
  •  
    Sep 09 01:57 AM
    Brian did you read the AOL announcement?

    "Statements regarding contract terms, contract execution, commencement dates and estimated revenues, as well as any other statements that are not historical facts, are forward-looking statements that involve certain risks, uncertainties and assumptions. These include... actions by customers"... (like not being able to pay!)

    But don't listen to industry insiders. Trust AOL every time. PBR's Energia nat gas affiliate ordered a newbuild drillship that will be financed and built by Japan. RIG has a fleet of 147 vessels.
    Reply
  •  
    Sep 09 05:47 AM
    Further on who's who in Brazil:

    Modec, SBM Offshore, BW Offshore, Saipem bid for PBR Tupi FPSO, with Modec likely winner at $400,000 per day. Jurong Shipyard building another FPSO for Petrobras $1.6 billion. SBM Atlanta, Modec, Floatec bidding for Papa Terra FPSO. Floatec probable winner in joint venture with Keppel Fels and J Ray McDermott to build at Brasfels. Diamond Offshore drillship at BM-S-24, probably move to Statoil BM-J-3 next. Seadrill drillship at BM-S-22. The only Transocean commitment is to Anadarko in Campos BM-C-30 and two other Anadarko blocks.
    Reply
  •  
    Sep 09 05:50 PM
    Otto, thanks for fine article, and all the interesting comments by you and others. Does anyone know "why" PBR peaked in May so far ahead of other majors and oil prices?? I have my own hunch on this, but would greatly appreciate other points of view. . As several of the commentors are highly knowledgeable on the intricacies of Brazilian oil, perhaps you and they can offer some enlightenment on this question.
    Reply
  •  
    Sep 09 11:33 PM
    www.offshore-mag.com/d.../

    Note that the article has 6 web pages. The comment about 15 wells drilled and 15 finding hydrocarbons is on the bottom of the first page.

    excerpt:

    Besides affirming that there is no technical barrier to explore under the salt layer, Guilherme Estrella, Petrobras’ E&P director, argues that there must be change in the sector’s regulations because the pre-salt exploration can be seen as low risk exploration activity. According to Petrobras, the discovery of the blockbuster natural gas and condensate field in the Jupiter area in the Santos basin reinforces the notion that there is practically no exploratory risk in the pre-salt layer.

    “Of the 15 wells we drilled during the last two years in the pre-salt, each one of them struck oil or gas. In fact, we have been drilling in the pre-salt area since we started drilling in Campos basin,” he says. “All of the pre-salt blocks achieved exploratory success, something that confirms the region’s high prospectivity.”

    Estrella, a geologist, is former head of Cenpes, Petrobras’ R&D center.

    end of excerpt.

    I'd still like an answer from you on why it will be a "market maker" if Exxon announces a find after all these other finds made by PBR ? Why does it only count if Exxon makes a find? What does it take to be a "grown up"? What qualifies you to make such a comment?
    Reply
  •  
    Sep 10 01:10 AM
    why BM-S-22 is a winner? Is it public information already?

    I'm brazilian and have not heard about this. BTW, PBR peaked in may because Brazil received the investment grade rating from S&P and Fitch in that month and all stocks went up. Meanwhile oreign investors shorted the market while the media hyped it up.

    I'm long the stock, started buying 10% up from current prices, I always had this stock but sold near the top because it clearly was a bubble.

    I agree with the guy who criticized Brazil, about Exxon's credibility adding to the potential ground discoveries. Certainly a market mover, I would go long PBR options if I knew the discoveries in BM-S-22 are a winner.
    Reply
  •  
    Sep 10 05:40 AM
    Pretty damn sad. Estrella was being economical with the truth. There were a dozen wells in the Campos exploration campaign that drilled to the basement. The "subsalt success" was finding a shale source that charged shallow turbidite reservoirs (82% of current oil production).

    One rank wildcat well in Jupiter. One in Tupi. One in Carioca. Plenty of broken drill strings, sidetracks, confusion, delay, political moonshine.

    Here's where things stand. No one knows anything for certain about Brazilian subsalt. Published geochem is inconclusive. Published well data admits there are no sands, only carbonates "of variable reservoir quality." The Norwegian wide azimuth seimic survey starts in October. Exxon's exploration program has good documentation. This will all be cleared up in a few months.

    My prediction: tight gas in dolomite. No recoverable oil leg.
    Reply
  •  
    Sep 10 11:25 AM
    To enerving markets: Thanks for answering my question to the best of your ability, but , in part, some of the question remains: Why did foreign investors short so heavily during that time period? They must have had some special inside or very astute info to do it with many weeks of rising oil prices ahead of them, and enormous paper losses, margin calls, etc. to deal with. I still don't get it completely, but your info helpful and appreciated greatly.
    Reply
  •  
    Sep 10 12:04 PM
    AvA,
    You are as economical with impartiality as you claim Estrella is with truth. Numerous on-line oil industry publications have reported the reserve estimates for Tupi. Are they all idiots? Are you the only one who sees through a facade? Is Brazil wasting it's money contracting for all those drilling rigs and is Exxon (the grown-ups remember...) wasting their money drilling at BM-S-22?
    Reply
  •  
    Sep 10 02:04 PM
    Enervingmarkets, to your question regarding the BM-S-22 block, see this 2002 publication:
    www.searchanddiscovery...

    Read it carefully as it answers your questions about why that block might be something special. Note that this was published before exploratory drilling had penetrated the salt layer in adjacent areas, finding major hydrocarbon reservoirs like Tupi.
    Reply
  •  
    Sep 10 05:35 PM
    Thank you for the info Kezorm.

    Petrobras found oil in the Iara oil field today. 4 millions barrels it seems.

    In the after market there are no more sellers. How much the stock might go up tomorrow?
    Reply
  •  
    Sep 10 05:45 PM
    SeekingTruth,

    the dutch boy with the "grown up" comment might not believe it, but brazilian investors are amongst the most astute in the world.

    They anticipated the whole investment grade rating story and bought Brazilian stocks like crazy during the whole year. Check the charts, Brazil was the best performing market during most of the year.

    I guess that when the investment grade rating was given, the market was really expensive and the new money that should have gone to Brazil didn't go. No foreign investor flow meant a freefall for stocks. But it really had all parts of a conspiracy theory in it.. As always the media pumped stocks real hard... Lots of people who never invested put their money and lost. People say here the banks bought the investment grade rating to short the market and they really seem to have done this.

    I would even go further and say that Brazil is a broad market leader. If you trade US stock indexes, I'd suggest you take a look at Brazil everyday to see how it's going. Why? It's kinda hard to explain, but basically, whatever move Dow or S&P500 will do in the future, Brazilian stocks are doing now. They go up before the US goes up, they go down before too...Some days the brazilian exchange is the only one falling and I'm like WTF? Some hours later I get the answer when stocks all over the world are bleeding... Those brazilian traders know their business, we usually say.

    Check monday intraday action in the Bovespa after the Fannie Mae and Freddie Mac announcement. We were down more than 2% that day, after starting 3% up. And it went down before all other stock exchanges. Now check the Dow and S&P on tuesday...

    I wish I could trade US indexes and profit from the brains of these rats.
    Reply
  •  
    Sep 10 05:49 PM
    Another tip I can give you guys as a brazilian is to look at Eike Baptista's companies OGX Petroleo and MMX Mineração. Tickers OGXP3 and MMXM3 on the Bovespa. OGXP3 is dirty cheap, might go down an additional 10%. It's a company that has bought some oil exploring concessions from the government.

    I think Baptista will be the richest man in the world in not much time... To say the least. Oh, but he may not be a grown up lol.
    Reply
  •  
    Sep 10 06:42 PM
    enerving... I think you meant billions, not millions regarding the new PBR discovery.
    Reply
  •  
    Sep 10 07:52 PM
    From a commercial perspective, Exxon's involvement is small potatoes, one drillship well for reconnaisance, dry hole cost split with Hess. I'm aware of the literature. No serious person calculates reserves on mag and grav, or a couple 2D lines looking through salt. I suppose Petrobras have enough well data for a velocity model to plug in to the WATS 3D survey. Structure is not the issue. And anyway, like I said, this will all be resolved in a few months.

    Reserves guesstimates are nothing. Wait and watch for production.
    Reply
  •  
    Sep 10 09:32 PM
    To enerving markets: Well, you have certainly given me perspectives that I could never have dreamed of sitting here in America, as have some of the others also, and I find your remarks facinating and extremely valuable. I think that in addition to your valid and sensible comments (the bubble,etc) that another factor was in play, but it is only a hunch. I think that the oil movers and shakers in Brazil knew well in advance that the Saudi's/OPEC were going to INCREASE production in the face of falling demand/demand destruction (try that one on for size) in order to help assure the Republicans oil around $100 for the Fall elections, something the Saudi's/OPEC started to fine tune again today, see Bloomberg: "CRUDE OIL RISES AFTER OPEC AGREES TO TRIM EXCESS PRODUCTION". I believe this factor (inside knowledge on the prior excess production) is the factor that gave the Brazillian and foreign investors the guts and the confidence to short PBR in the face of strongly rising oil prices and not have to worry about having to ultimately cover the shorts at a bad and unprofitable time. It "is" an American/Saudi oil cartel , and the rest of OPEC just tags along, follows orders and reaps easy profits. I am in a novice learning mode as far as Brazil is concerned, and what part they play in all this, and that is why I greatly appreciate your knowledge and points of view. Please keep sharing all you can, and the others as well and best wishes to all.
    Reply
  •  
    Sep 10 09:33 PM
    "one drillship well for reconnaisance, dry hole cost split with Hess." I wrote to Hess and West Polaris will drill t-w-o holes... one after another. And why were these holes going to be "market makers" (drilled by grown-ups...) when you first brought it up, but now... they are going to be "dry"?

    No one claimed to calculate reserves based on grav or mag. The link was provided to answer the question: "what is so special about BM-S-22 ?"

    Honestly V, do you think that Exxon would not have bothered planning these two holes if they had talked to you first? In your judgement, are they wasting their time? If not, why not? Is it possible that the holes WILL be "market makers" ? And if they meet that standard, will the previous 15 Petrobras finds contribute to the big picture, or will Exxon need redrill them all before you will admit that a hole is a hole and a find is find no matter who drills it?
    Reply
  •  
    Sep 10 10:24 PM
    Kezorm:

    "Dry hole cost" is a technical term. It means the cost of drilling to the target formation, not including well completion. No one spuds a well expecting it to be a dry hole. Nor do I claim any PBR wells were dry. They had shows. They flowed gas and condensate on test.

    I regard Exxon as a better outfit than Petrobras. More importantly, they are a commercial company. Wait and watch what Exxon reports and decides to do in Brazil, based on what they find. If they flip it to PBR as a gas resource, then Tupi is a dead duck (economically). Contrariwise, if Exxon find a big, porous oil sand, then my reputation is toast.

    Fair enough?
    Reply
  •  
    Sep 10 11:04 PM
    One final thought. I have some skin in this game, because I issued an Energy Analyst report on PBR, a summary of which was published on SA June 2nd with a sell recommendation:

    seekingalpha.com/artic...

    If you want a copy of the entire 12-page report, you have to be an SEC qualified investor or broker. Email my office. I have no position in any oil company. Don't own any options. Brazil subsalt is a frontier play. My involvement in this discussion is actually procrastination, because I have to make a $30 million decision this week whether to commit to a proven oil producing trend elsewhere. Everything looks good: source, seal, structure, reservoir. But statistically, it's always a 1-in-10 gamble, even in a proven producing trend. Subsalt Brazil is incalcuably worse. No production. Sour, tight, high pressure gas in ultradeep water.

    The world needs and wants Brazil to produce 100 billion barrels of oil. It ain't gonna happen. Meanwhile, I have to decide whether to bet on a sure thing, with a 10% chance of winning.
    Reply
  •  
    Sep 11 01:56 AM
    SeekingTruth,

    glad you appreciated the comments.

    The players in Brazil really seem to know everything. Probably "investment grade" meant hedge funds could invest in Brazil, and instead of buying they sold stocks short using their insider information about oil. It's a less regulated market than the USA and no one really goes to jail here if they have the right amount of money. It also was the last BRIC to receive the upgrade. Maybe the plan since the beggining was to end the commodities cycle after Brazil received the upgrade? If you check the stock market charts, you'll realize that the index went up more than 15% over the previous top in just a few days, after returns of 50% over the last 5 years. Just month after the rating the index was melting, and short interest had never been so high like it was at the top.

    One thing you all must know about the PBR story is that the government is morally dubious here, seriously. The president told all governors in a meeting that Petrobras would go up because it had find alot of oil (it's not me saying this, it was the #1 selling paper in the country). The stock went up like 40% after the Tupi discovery and fortunes were made in off the money options, bought by people with inside information. Why? Out of the money options volume had never been so high like that.

    Conspiracy theories aside, I still believe that Brazil probably has more oil fields on the country, not in the sea. This country is very blessed with natural resources. It's just a matter of time until Petrobras finds more. I buy Petrobras because it's a company that is run by idiots and can be run by idiots, because this country has alot of reserves. I sell Warren Buffet's philosophy but I do buy in this phrase.

    Now I ask you, if oil is so hard to drill at the sea, why the hell Soros bought so much stock 50% up from it's current price? Ok, so he sold his Vale shares... Still, biggest stock holding in his fund...
    Reply
  •  
    Sep 11 03:28 AM
    Alan,

    just read your sell recommendation on PBR. Absolutely successful, does it still carry a premium over other oil companies?

    I was short the whole brazilian market at the top. I really can relate to your call. It was a really bullish time, I really laughed at the comments people made about the article... That's how I'm laughing of people who did not see it coming.

    I confess though that they kinda got me too... I exited the short too soon. I wish I had read your post back then so it would give me ALOT more confidence... I bet the bullish comments would just feed my negative feelings.

    Now that I'm realizing that brazilian stocks were so appetizing to sell at the top, I'm considering the "safety" of the US Dollar or maybe Gold, which is always safety in times of uncertainty. My fear is that the short position is so big that it will only push stocks lower. Local investors cannot face the "gringos" (foreign investors). There are still long foreign investors though, but they never faced so fearceful competition on the sell-side like this time. The bubble might deflate to levels we did not imagine before.
    Reply
  •  
    Sep 13 02:50 PM
    I like transocean (RIG) - but this talk of its 'exposure' to Brazil is a little bit silly. As if RIG would have a hard time finding new customers (backlog is years not months) if PBR backed out of any of its leases (not going to happen). One of the funniest things I've heard from a CEO in recent months- was on the conference call when the discussion of "how to get money back to shareholders" took place. In NYC we call that a high class problem".

    Getting back to PBR- it is a great opp- but suffers from lack of understanding on the part of the many 'fad' investors that buy the flavor of the month whether its IPI or V or whatever else pops up on 'fast money'. PBR corrected along with the crude market, the bovespa, and its own parabolic anamoly. Valuation is very reasonable now and for those that bit hard in the 40$ range- the rewards will be signficant.

    southamericanstocks.co...
    Reply
  •  
    Sep 13 10:12 PM
    "Contrariwise, if Exxon find a big, porous oil sand, then my reputation is toast."

    Enough oil and porosity makes the sand optional... but if you provide that "toast", I'll provide the tea. :)
    Reply
  •  
    Sep 14 02:40 AM
    Kezorm wrote:

    > Enough oil and porosity makes the sand optional...

    I appreciate the offer of tea, and I'm glad obviously to have a friendly tete-a-tete, but note that I was speaking precisely about an Exxon subsalt sandstone discovery which I believe is unlikely and which Petrobras targeted and did not find. There was a productive pre-rift sand Sergi Formation in the Manati Field that raised expectations in pre-rift and sag phase subsalt plays. No dice. PBR found layered carbonates in Tupi and Jupiter. I wish I had more info (always the case everywhere), but the discussion so far has been high pressure injection and fracing, which means low perm, tight gas.
    Reply
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