Profit from the End of Cheap Oil: Petrobras
Companies / Oil Companies Feb 12, 2009 - 02:29 PM GMTBy: Oxbury_Research
I knew I had made a mistake only seconds after I did it. I had decided to sit down and watch CNBC's Power Lunch with the sound ON for a few minutes while I ate my sandwich. I figured – how many brain cells would I possibly kill off in just a couple of minutes?
However, I had forgotten about my high blood pressure. Bill Griffeth was talking to some oil trader about oil which was up a few pennies on the day. Bill Griffeth began lecturing the trader, “Why in the world is oil up? How can oil possibly be up in the face of deflation, demand destruction, etc.”
Bill Griffeth made it sound as if oil should go to zero immediately. I felt my blood pressure rising rapidly. I yelled at Bill Griffeth, “Get your head out of your short-term focused arse!” Then I wisely turned off the TV and muttered to myself “Never again watch CNBC with the volume ON!” How a loser like Bill Griffeth is still employed is beyond me.
Oil's Long-Term Picture
Getting away from the morons at CNBC, the longer-term picture for oil is actually quite good. Oil is now trading well below its replacement cost, which most experts peg to be between $65 and $75 per barrel. In the long run, dwindling supplies and resurgent demand, along with a lack of investment will cause the price of oil to once again spike skyward.
I think that the key component to future rises in the price of oil is actually the low price of oil we have right now. These very low prices have shut down much of the desperately needed investment in new capacity. This lack of investment has sown the seeds of much higher oil prices in the future.
The International Energy Agency (IEA) recently came out with what I consider to be some pretty conservative estimates. The IEA believes that oil demand will advance on average by 1.6% annually until 2030. This would bring the total daily demand for oil to 106 million barrels.
On the supply side, output from the world's oilfields is declining faster than previously thought. In its latest report, the IEA estimated that the annual decline in the world's oilfields has accelerated from a decline rate of 3.7% per year to a decline rate of 6.7% per year. The rate of decline is particularly steep for some of the world's major oilfields, such as Mexico's Cantarell field.
In their latest report, the IEA estimated that China, Brazil and other emerging countries alone will need investments of $360 billion a year through 2030 to meet future demand for oil. The IEA went on to say that in order to meet future demand for oil, the world as a whole will need $26.3 trillion in supply-side investments over the next 21 years.
With the current depressed price for oil, along with the banks not lending out a dime to anyone, this much needed investment just will not happen. This will lead to the world once again seeing triple-digit prices for oil, probably within the next two years.
Investors looking to profit from this future price rise in oil need to look for a company that, despite the current economic crisis, is continuing to invest in exploration and development. Investors should also try to find an oil company that is actually adding oil reserves and not depleting their oil reserves as are most oil companies.
Petrobras – PBR
I believe that one company which meets these criteria is the Brazilian oil giant – Petrobras. The company is the only major oil company which is actually expanding their reserves. This expansion in the company's reserves is due to the major oil fields that Petrobras has discovered in the deep waters offshore Brazil in the last few years.
These mega-oilfields are the largest oil discoveries made in several decades. In fact, British Petroleum's CEO, Tony Heyward, believes that the waters off Brazil's south-eastern coast hold oil reserves as big and important as those discovered in the North Sea in the 1970s.
Petrobras is in the early stages of exploring these pre-salt oil fields – discovered in 2007 under several miles of seawater, rock and a hard-to-penetrate layer of salt. The company itself has made no official estimate of the total size of the oil fields. However, Brazilian state officials have spoken of 100 billion barrels to add to Brazil's proven reserves of 14.4 billion barrels of oil and natural gas equivalent.
Petrobras plans to spend a great deal in developing these fields and increasing their oil production. The company is expecting to increase their oil production from 2.18 million barrels per day in 2008 to 3.31 million barrels per day in 2013 and to 5.1 million barrels per day in 2020.
Recently, Petrobras announced their investment plan. The company's strategic plan for 2009-2013 calls for investment of $174.4 billion, a substantial increase on the $112.4 billion stated in its 2008-2012 plan. This new plan is the first to include actual investment into developing the pre-salt fields.
With the current financial conditions, how in the world is Petrobras going to raise the necessary funds to fund their five year plan? Of the $174 billion needed over those five years, Petrobras could finance $120 billion from their own cash flow. This estimate is based on a Brent crude oil price of $42/bbl.
If the price of Brent crude goes above $42/bbl. and stays there, Petrobras may be able to fund their expansion plans entirely through their own cash flow. However, if the price of Brent crude oil stays at $42/bbl or lower, this will mean that Petrobras needs to find additional funding elsewhere.
Petrobras is exploring two possibilities for additional funding. One possibility is obtaining funds from other countries. Petrobras is currently in very intense talks with both China and the United Arab Emirates (UAE) about possible funding.
The second possibility involves getting funding and/or working closer with other energy companies that are also conducting exploration activities in the area. These companies include: BG Group of the UK, Galp Energia of Portugal, Repsol, Royal Dutch Shell, Hess and Exxon Mobil.
PBR – the Stock
The 52-week range for Petrobras' common stock (PBR) has been between a high of $77.61 and a low of $14.73 which it hit during the dark days of November. In my opinion, I don't believe that PBR will ever re-visit that level again.
The stock has rebounded nicely to over 30 recently, yet it still trades at a single-digit PE ratio. The Wall Street crowd, as evidenced by CNBC, still hate oil in general and Petrobras specifically. They say it's still “overvalued”.
I am telling investors to ignore the short-term focused Wall Street crowd and to purchase Petrobras now (ideally, under $30). With Petrobras, investors will be buying a company that is actually increasing their reserves of oil in the ground and a company that will benefit greatly from the end of cheap oil.
Cheers,
Tony D'Altorio
Analyst, Oxbury Research
Tony worked for more than 20 years in the investment business. Most of those years were spent with Charles Schwab & Co., both as a broker and as a trading supervisor. As a supervisor, he oversaw, at times, dozens of employees. Tony was trading supervisor during the great crash of 1987 and was responsible for millions of dollars of customers' orders.
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
© 2008 Copyright Nick Thomas / Oxbury Research - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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