Is VALE Now an Oil Company?

By: Claudio Freitas, CFA

Last week Petrobras (PBR) announced that the consortium formed by Repsol (REP - Operator - 40%), Petrobras (35%), Vale (VALE - 12.5%), and Woodside (12.5%), has confirmed the existence of hydrocarbons in the well known as Panoramix, located in shallow waters in the Santos Basin, 185 km off the coast of the state of São Paulo, Brazil.

The discovery was proved after new tests that were carried out in the reservoirs at depths around 4400 meters. The analysis of the results indicates a maximum theoretical supply capacity of 572,000 m3/d and 2,370 bpd.

Although this is just another discovery for Petrobras -- which is quite positive considering the continued new discovery announcements -- it is something quite new for Vale, which is a beginner in the oil exploration business. The market became excited about Vale just after the discovery was announced, however we believe there is no real reason for this excitement.

The oil exploration business is something new for Vale and, maybe, it will represent something worth considering in the medium-to-long term. This particular Panoramix field is interesting, but there is not enough information to be sure that it is really something important.

In the short-to-medium term, the business of Vale will remain metal commodities, particularly iron ore. Finally, first quarter results for Vale were not that exciting. We are keeping our Hold recommendation on Vale and our Buy recommendation on Petrobras.

Comments

[oldfolkdancer:]

Vale competitor BHP is in oil. I don't see what the problem is. It's not like they are in the consortium alone. They have very experienced partners in this venture. Vale is probably providing cash in return for a certain amount of oil which they need for the core business of mining and refining. Seems like a wise move.

May 18 11:29 AM

[362012:]

"particularly iron ore." Don't forget nickel (Inco).

May 18 09:43 PM