Thursday, September 3, 2009

Petrobras (PRB) - Still a Sure Thing?

I've often said to people the rate of change in this world is such that there are very few companies outside of the Johnson & Johnson's (JNJ) or Procter & Gamble's (PG) that you can buy and forget about for a decade. And the high(er) growth era for those type of stocks are long gone. One name I touted in 2007, and 2008 as a stock you could buy, go on a 10 year cruise and come back to was Brazilian oil giant Petrobras (PBR). I thought this was the next Exxon (XOM) or in fact better since it's almost like buying a Brazilian version of a Saudi Arabian energy conglomerate.

However, proving my point at how little is stable over any long term period of time - we have had some rumblings out of Brazil of late which could take the long term shine off of Petrobras. Some of the language is downright "Putin-like". This despite the fact Brazil is moving into the top 10 world's producers of black gold.
  • Brazil will be among the world’s top 10 oil producers within the “short term,” as the country develops offshore fields, Energy Minister Edison Lobao said.
  • Petrobras Chief Executive Officer Jose Sergio Gabrielli said the company’s proved oil reserves may double in the next two years as the Tupi, Iara and Whales Park fields, whose licenses have already been granted, probably hold about 14 billion barrels of crude. The company plans to spend about $174.4 billion over the next five years, including more than $30 billion on the development of the pre-salt fields. The pre-salt area runs 800 kilometers (500 miles) along the coast from Espirito Santo to Santa Catarina states and has oil deposits beneath a layer of salt resting as deep as 3,000 meters below the seabed.
  • Brazil’s proved oil reserves totaled 12.6 billion barrels last year, according to London-based BP Plc, which ranks countries by production.

Let's take a closer look at the rumblings:

From August 31:
  • Brazil’s state-run oil company, fell the most in six months on concern the company’s plan to sell additional shares may increase the government’s stake and dilute minority holders.
  • President Luiz Inacio Lula da Silva, who unveiled rules on exploration today, is seeking to increase state control of the nation’s oil reserves. As part of the plan, Petrobras said it may sell new shares to the government and other investors, without providing details. The company also may receive a $50 billion capital injection from the government in exchange for securities, Senator Romero Juca said in Brasilia.
  • State-controlled producer Petroleo Brasileiro SA will be the sole operator of the pre-salt oil fields and have a minimum 30 percent stake in future ventures set up to bid for licenses.
  • Brazil is following countries from Venezuela to Russia in taking greater control of crude reserves after prices rose to a record $147.27 a barrel last year. The discovery of the pre-salt Tupi field was the largest since Mexico’s Cantarell, and helped make Petrobras the world’s third most-valuable oil producer.
While a very lengthy debate can be had on the merits of this for the country (and its people) as a whole, it certainly doesn't seem to bode well for shareholders. Now this truly is socialism (for the people) unlike what happens in the States (socialism for the corporation).
  • “The pre-salt is the passport to our future,” Lula, 63, said in Brasilia. “Petroleum and gas belong to Brazilians and to the government. The model to be adopted must ensure that the biggest portion of income stays in the hands of our people.”
  • The changes announced today create “a new regulatory framework to strengthen Petrobras, to allow the government to become the owner of the petroleum,” Lula said. The new model allows the government to keep a bigger share of the oil profits by requiring outside companies to share crude drilled from pre- salt fields with the state rather than the current model based on royalty payments.
  • The proposal, which needs congressional approval, includes the creation of a new state company called Petrosal to manage pre-salt fields. Brazil also plans to create a “social fund” to use revenue from pre-salt oil to reduce poverty and improve education, healthcare and science, Lula said.
  • Calling it an "independence day" for Brazil, Mr. da Silva said in a radio address Monday that his goal was to "make Brazil become richer, more developed, from the scientific point of view, from the educational point of view, from the point of view of social policies. All of this because of oil.
  • To make good on his promise, Mr. da Silva will need to succeed where generations of Latin governments from Mexico to Bolivia have failed: Turning vast natural resource wealth into an engine of development. Brazil, with some of the world's biggest stores of iron ore and silver, has among the world's widest rich-poor divides. With the new oil discoveries, "God has given us another chance," Mr. da Silva said recently.
  • Congressional debate over the plan will be heated. Some opposition congressmen said a bigger state role will create opportunities for corruption. Mr. da Silva,Add Image however, commands majority support in Congress.
Now you must ask if you are investing in Brazil's other natural resource giant, miner Vale (VALE) if that too shall fall under the same umbrella. I'll stick with Australian BHP Billiton (BHP) myself.

On the other hand the government infusion of capital might be a boon to deep sea drillers and the like - government is naturally quite poor of a negotiator since they are using "other people's money". (see $800 toilet seats) [May 15, 2008: Petrobras Hordes the World's Deep Sea Water Drillers]

[Jun 13, 2008: Petrobras First Ethanol Mill / Pipeline Ready in 2009]

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