Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Chinese Tech Stocks CCP Paranoia and Best AI Tech Stocks ETF - 26th Oct 21
Food Prices & Farm Inputs Getting Hard to Stomach - 26th Oct 21
Has Zillow’s Collapse Signaled A Warning For The Capital Markets? - 26th Oct 21
Dave Antrobus Welcomes Caribou to Award-Winning Group Inc & Co - 26th Oct 21
Stock Market New Intermediate uptrend - 26th Oct 21
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Attention, Barrelheads: Petrobras Shares Are on Sale

Companies / Oil Companies Jul 31, 2010 - 01:26 AM GMT

By: Investment_U


Best Financial Markets Analysis ArticleOil.

A touchy subject these days, I know – even with cleanup crews in the Gulf successfully removing much of the spilled oil from the water.

But I don’t want to talk about U.S. oil in today’s article. Instead, we’re going to head south to check in on a company that has gained increasing international attention over the past several years, having made some of the world’s largest oil discoveries in recent decades.

We’re heading to Brazil and the offices of oil and gas conglomerate, Petroleo Brasileiro (NYSE: PBR) – or Petrobras, as it’s more commonly known…

Right off the bat, the company faces a problem: most of Brazil’s offshore oil is located between layers of salt nearly seven miles below sea level. As you can imagine, extracting and producing this oil in an economical way is a daunting task.

But Petrobras engineers and geologists think outside the box. The company has invented and perfected both seismic and drilling techniques along the way. And the initial risks now look like they’re going to pay off in a big way.

Or are they? Let’s take a look at the potential hazards and rewards for Petrobras…

Petrobras’ Underground Oil Bonanza

Four years… $224 billion.

That’s how much money Petrobras plans to spend on development of its offshore oil fields and onshore refining facilities between now and 2014.

This massive sum alone should be an indication of how much oil is down there and the level of Petrobras’ optimism. The current figure puts the “official proven reserves” at six billion barrels of oil, but some believe there could be 10 times more than that.

Frankly, I think even that number could be on the low side. I believe Petrobras has enough potential reserves (whether undiscovered or unannounced) to become the next Saudi Arabia of oil. Time will tell.

For now, though, the company’s other offshore fields are already churning out oil to the tune of nearly two million barrels a day. And there are many offshore areas that it hasn’t even explored yet.

That’s the good news. Now for the bad…

Hello, Government… Goodbye, Common Sense

While history is littered with examples of failures from nationalized oil and gas investments (Venezuela, Russia, and Nigeria to name a few), Petrobras isn’t one of them.

Brazil formed Petrobras back in 1953, under the leadership of then-President Getulio Vargas. It remained a legal oil monopolist in the country until 1997.

Today, it’s the largest company in Latin America by market capitalization ($158 billion) and in revenue ($92 billion in 2009). It’s also the fourth-largest energy company in the world.

But the Brazilian government still has the biggest piece of Petrobras firmly under its management. In fact, all the unexplored oil blocks that Petrobras once had under its control have reverted to the Brazilian government.

Perhaps most importantly, though, the government holds 55% of voting control in Petrobras… despite only owning 33% of the shares.

And now it’s making a grab for even more control. It’s utilizing a controversial plan that would grant Petrobras production rights for up to five billion more barrels in return for more shares – and thus, more authority.

The question is: Why would the government bother? Do its officials know something that the general public doesn’t in terms of the estimated amount of oil sitting beneath Brazilian waters?

Perhaps. But the short-term reason is that it sees a potential cash windfall that it intends to direct toward social programs that it wants to implement.

Three Reasons Why Petrobras Could Soar Over the Next 12 to 18 Months

Not surprisingly, when the government announced that it planned to grab more control of Petrobras, investors began fleeing the company in droves.

Once a high-flier in the oil industry, Petrobras shares are down 25% since the beginning of 2010. The stock is trading at a significantly discounted price/earnings ratio to the likes of ExxonMobil (NYSE: XOM).

However, I believe investors’ fears about the government’s moves are overblown, not to mention fresh concerns over deepwater drilling. Once both subside, Petrobras shares could see significant upside from here, perhaps as much as 50% or more in the next 12 to 18 months.

Here are a few reasons why:

  • The company plans to boost its production output by 9.4% per year, doubling production output to 3.9 million barrels per day by 2020. (It currently produces around 2.5 million barrels per day.) That’s a significantly better growth rate than all the other big producers.
  • At 38%, Petrobras boasts the second-highest gross margins in the oil and gas industry. This is a key measure of profitability and by way of comparison, Exxon Mobil’s margins are running at about 29%, which is the average for the overall industry.
  • Petrobras notched up trailing 12-month sales of $190 billion and annual sales growth north of 18%. It’s only a matter of time before the stock price catches up to these numbers.

Petrobras Isn’t All About Oil…

But lest you think Petrobras is all about oil… it’s not…

  • It has operations all over the globe, with exploration or production efforts underway in 27 different countries on every continent.
  • The company operates 112 production platforms, more than 8,000 service stations, 16 refineries and 10 thermoelectric power generation facilities.
  • It’s also branching out into biofuels – big business in Brazil – and plans to spend nearly $3 billion on their development in the next three years.

Tasked with balancing Brazilian government interests, the need for huge amounts of capital, and fleeing shareholders, CEO Jose Sergio Gabrielli certainly has his work cut out for him in the months ahead.

But if you’re looking for a bargain in the oil patch, take a closer look at Petrobras. It’s a consistent over-achiever relative to its peers and its shares are currently selling at fire-sale prices.

And if you can handle a little stock market volatility, plus the ups and downs of the oil sector in particular, you could be richly rewarded a year or two from now.

Good investing,

David Fessler

Editor’s Note: You can bet that when it comes to energy and infrastructure developments, David Fessler is hot on the trail of the latest news. Whether it’s oil, natural gas, the electric grid, or alternative energy sources, he’ll show you how to profit from these critical sectors. Check out his Peak Energy Strategist for all the details.

Copyright © 1999 - 2008 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email:

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in