Petrobras: New Regulatory Model Points to Stock Issue

Buy-recommended Petrobras (PBR) offers unlevered appreciation potential of 37% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $58 a share. The President of Brazil, Mr. Lula da Silva, has proposed an equity injection into Petrobras as part of a new model to regulate areas currently unleased in the offshore Pre-Salt trend. The federal government would pay for its one-third in oil while other shareholders would pay cash. A new government company, Petrosal, would own the government’s share of new leases while Petrobras would be the operator and have a minimum interest of 30%.

The details to assure fair treatment to all parties remain to be determined and the proposal is subject to legislative approval or rejection, apparently within 90 days. The multi-billion dollar stock offering would be in the first half of 2010. Petrobras is unlikely to be treated negatively in the new regulatory regime as the president’s chief of staff and candidate to succeed him in an upcoming election, Ms. Dilma Rousseff, is Chair of Petrobras.

Meanwhile, as we wait for second quarter results under U.S. accounting, we take actual volumes and prices from disclosures made when results under Brazilian accounting were released in mid August. We make no change in NPV since the new regulatory program covers areas yet to be explored. Offering long- term appeal, subject to challenges from time to time, PBR stock may be timely as it trades at no premium to its 50-day average and above its 200-day average.

Originally published on September 3, 2009.

Comments

[Alan von Altendorf]

We reiterate and affirm our SELL rating on Petrobras.

2009 Oct 14 12:11 PM