Bright Future for Petrobras and Brazil

Nov.19.09 | About: Petrobras - (PBR)

Here’s a link to Petrobras’ (NYSE:PBR) 3rd quarter conference call which took place Tuesday.

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PBR is trading around $52, which is up about 10 (25%) points since my last article on PBR back in June.

I’m not going to go into all the nitty gritty details of this call. What I will do is simply give an overall impression of this company after listening to the call:

  • Production continues to grow. The only limitation seems to be how many holes PBR can punch into the sub-salt and how quickly they can build lift and delivery infrastructure. The oil is there, and it’s there big-time!
  • For the first time, Brazilian production exceeded 2 million barrels a month for two consecutive months.
  • The Brazilian oil is very desirable high-quality light-sweet crude.
  • The financing needed to fund the drilling programs is there now and will be there in the future.
  • A few analysts calling in wanted to get clarification on Tupi reservoir estimates of 5-8 billion barrels. Was there more information now such that the estimates could be refined on the low-side or on the high-side? Petrobras management would not change the estimate, but I was left with the impression, wow! These guys are talking about billions of barrels of oil like they are talking about loose change in their pockets. PBR’s management didn’t take the analyst’s bait, and are being conservative. My gut tells me there is nothing but upside in both reservoir and production estimates.
  • The CEO talked about how falling oil prices are a headwind and rising oil prices are a tailwind. Today the wind is blowing in favor of PBR shareholders.
  • These PBR guys speak in really cool accents. I bet they are very popular with the ladies.

So, yeah, not a terribly technical review of the call, but sometimes it’s better not to get all tied up in technicals and just view the big picture. The big picture is that PBR may have the best portfolio prospects of any oil company in the world. They will definitely be increasing production of the world’s most strategic commodity for years to come.

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Yes, the dividend is skimpy – even worse than ExxonMobil’s (NYSE:XOM) (I didn’t think that was possible). However, the company does have a history of dividend payouts and the stock has split 2:1 twice over the past four years.

People always point to the political risk of investing in Petrobras as a big negative. The pundits on CNBC would have you believe Brazilian President Luiz Inacio Lula da Silva is the second coming of Castro. However, the same people don’t seem to understand the political risks of investing in the United States. My readers know I speak often about the fundamental problem with the US economy: reliance on foreign oil imports in an era when worldwide oil supply will not keep up with worldwide oil demand (assuming a “functioning” world economy). The US is also printing money as fast as possible, and with folks like Bernanke and Shapiro in charge of monetary and regulatory policy, we can expect further US dollar depreciation and more fraud. I’ve listened to Lula speak about financial regulation, and I have seen how Brazilian banking policies have been shaped. It’s amazing what common sense and pragmatism can accomplish. Brazil has also adopted natural gas transportation and is thus in a position to export its oil treasure. Lula knows what he is doing. Contrast that with President Obama (or Bush) who apparently is owned by the coal industry and Goldman Sachs. The US sits on massive clean and cheap natural gas reserves yet refuses to adopt natural gas transportation. So, you can bet the US will be first in line to buy PBR’s light sweet crude (that is, if it can out-bid the Chinese…) in the coming years. Meantime, the US dollar keeps dropping and the Brazilian real keeps appreciating.

The future is very bright for Brazil. Perhaps that is why the Economist magazine’s cover story this week is “Brazil Takes Off” accompanied by a picture of the famous Christ the Redeemer statue photo-edited to look like a rocket ship taking off. Sure Lula wants to improve the living conditions for all the Brazilian people. But that’s what good leaders are supposed to do! The gold mine that is Petrobras will be able to reward both the Brazilian people and its shareholders. The stock is a steal at current prices and my biggest regret is not picking up more PBR during the recent economic “crisis” when PBR traded all the way down to $15/share. Since that time, PBR has rocketed over 300%.

Disclosure: the author is long PBR.