Oil Giant Petrobras: Gloomy Outlook Or Buying Opportunity?
A little too much publicity is a bad thing. Testimony of the fact is the Brazilian state oil company Petrobras (NYSE:PBR) that had managed to raise $70bn (£44.7bn) in the world’s largest public share offering. After all the build up to the IPO, while the frenzy and the euphoria slowly faded, investors as well as traders have been looking at the organization’s future plans and prospects ever so keenly ever since.
Petroleo Brasileiro SA fell to the lowest price since March 2009, extending the worst performance among the world’s biggest oil producers, on concern its $70 billion stock sale exhausted demand for the shares and slid 2.2 percent to 25.30 reais, the lowest price since March 3 last year, at 4 PM New York time yesterday. The stock is down 31 percent this year, more than the 27 percent plunge for BP Plc (NYSE:BP), the driller that set aside $32.2 billion to pay for the worst oil spill in U.S. history.
Raising Debt: Meanwhile the Chief Executive of the Brazilian state-run oil giant Petrobras, Jose Sergio Gabrielli has confirmed that will need to raise $60 billion from debt capital markets over the next five years to fund a large investment program after the company raised more than $70 billion last month in the world’s biggest share offering as it looked to finance its $224 billion investment program for the 2010-2014 period.
Petrobras Government Intervention Woes: Petrobras exchanged $42.5 billion in new stock in return for the right to develop offshore crude reserves, helping the government boost its stake to 48 percent from 40 percent. Adding an additional layer of complexity, the oil backs newly issued government bonds that the authorities are using to make their share purchases. As a result, other investors are also permitted to pay with government bonds. It remains unclear how Petrobras might use these securities, as opposed to cash, to pay for its needed goods and services. Petrobras will later return the bonds to the government as it pumps the promised oil. There is a concern that government intervention in Petrobras will only intensify with the expected election of Dilma Rousseff, in the upcoming presidential elections in October. Whatever way one looks at it, the fact of the matter is that the government’s stake and influence in Petrobras have increased and with pending elections in October this year, the future is quite uncertain unless the results come out.
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).
It is notable that PBR has clearly under performed comparable companies and the broader market overall, especially since April of this year.
Ratings Drop: Barclays Plc and Itau Unibanco Holding SA cut their Petrobras ratings in the past week, saying profit will be diluted by the share issue. Petrobras may be forced to sell equity again as soon as 2013 should crude prices slump
There is no denying the fact that Petrobras, Brazil’s oil giant, has located lots of oil and gas, but the reserves are hundreds of kilometers offshore and several kilometers under the ocean and a thick cap of geological salt. The company needs hundreds of billions of dollars in investment funds and will run cash shortfalls for years. Worst of all, the government insists on keeping a controlling stake and is not even paying cash for its shares.
Upside: Although Petrobras stocks might be sluggish as of now but with analysts have expressed confidence that Petrobras shares could see significant upside from here in the next 12 to 18 months after election results and a few months into the new government could help decipher government’s moves while the company is also expect to work around its deepwater drilling issues in the new future. Petrobras boasts the second-highest gross margins in the oil and gas industry at 38% which 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.
As most emerging nations continue their infrastructure development projects at a strong rate, there is bound to be a substantial increase i demand for resources, machinery, commodities and energy and that’s where a global powerhouse like Petrobras can really make a difference. For the long-term investor who can handle market volatility considering the spikes in the global oil sector Petrobras still remains as a very attractive wealth creating opportunity.
Oil Global Outlook:
According to the Oil Market Report released in September 2010 by The International Energy Agency (IEA), Global oil demand is projected to average 86.6 mb/d in 2010 and 87.9 mb/d in 2011. 2010 readings were revised marginally higher based on stronger data from OECD (Organization for Economic Co-operation and Development) countries. The report also projects global oil demand to grow by more than 25% in the coming 20 years:
For the short-term, investors are better off keeping an eye on market trends, geopolitical risk, credit issues while for the long-term, investors would consider the correlation with overall global growth and economic recovery, improved industrialization and growing oil demand from India and China.
For those who would like not like to play Petrobras (NYSE:PBR) directly the iShares Brazil (EWZ) ETF is a good indirect investment option.
EWZ Top Ten Holdings
1. Vale SA: 9.38%
2. Petroleo Brasileiro S.A. (PETR4): 9.18%
3. Itau Unibanco Holding SA: 9.14%
4. Petroleo Brasileiro S.A. (PETR3): 7.58%
5. Cia Vale Do Rio Doce-Adr: 6.83%
6. Banco Bradesco Sa Brad: 5.07%
7. Itausa Investimentos Itau Sa: 3.34%
8. Cia De Bebidas Das: 3.26%
9. OGX Petroleo E Gas Participacoes S.A. (OGXP3): 3.06%
10. BMF Bovespa S.A. Bolsa Valores Merc Fut (BVMF3): 2.83%
Expense Ratio: 0.63%
Other Oil ETFs
United States Oil Fund (USO): The investment objective of USO is for changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the spot price of light, sweet crude oil, as measured by the changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange that is the near month contract to expire, less USO’s expenses.
Expense Ratio: 0.80%
United States 12 Month Oil (USL): The investment objective of USL is to have the changes in percentage terms of the units’ net asset value reflect the changes in percentage terms of the price of light, sweet crude oil, as measured by the changes in the average of the prices of 12 futures contracts on crude oil traded on the New York Mercantile Exchange
Expense Ratio: 0.86%
PowerShares DB Oil Fund (DBO): The Index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (NYSE:WTI) and is intended to reflect the performance of crude oil. You can’t invest directly in an index.
Expense Ratio: 0.50%
The iPath S&P GSCI Crude Oil Total Return Index ETN (OIL): The index reflects the returns that are potentially available through an unleveraged investment in the West Texas Intermediate (NYSE:WTI) crude oil futures contract plus the Treasury Bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.
Expense Ratio: 0.75%