Petroleo Brasileiro Riding Discovery To New Highs

Petroleo Brasileiro S.A. (PBR) is Brazil's national oil company. The Brazilian government owns approximately 32% of Petrobras common stock.

On November 8th, Petrobras announced its Tupi discovery which has the potential to have between 5 and 8 billion barrels of oil equivalent (BOE). Petrobras has a 65% stake in the discovery with the remaining interests being held by BG Group (25%) and Petrogal - Galp Energia (10%).

On Thursday, Citigroup upgraded Petrobras from a hold to a buy. Zacks analyst Claudio Frietas last month upgraded Petrobras from a hold to a buy.

Risks: Since the Brazilian government is Petrobras major shareholder, there is a political risk associated with this stock. Also the Brazilian Real has strengthened almost 16% versus the dollar in the past year and 50% in the past 5 years. Currency appreciation might cut into earnings especially if oil prices drop.

My Take: Petroleo Brasileiro's stock made a strong move based on Citigroup's upgrade Thursday. It seems Petrobras stock will continue its upward trend as pre-market it is up $4.00 to $112.00. If you believe oil prices will continue to be strong, Petrobras is a good stock to own based on future earnings growth due to the Tupi discovery.

Comments

[elliot_mllr:]

Isn't it a little premature to start attributing earnings to Petrobras from Tupi? Surely, production is many years away.

2007 Dec 24 03:45 PM

[Neville M.:]

Elliot,

The impact of the Tupi discovery isn't one that will reflect on the balance sheet a year from now as it's at least 3-5 years from production. I'm looking at a longer-term view of oil prices.

2007 Dec 24 07:01 PM

[UncleFred:]

The other problem to be aware of is that the Tupi oil discovery is in very deep water, and even then deep under ground. It is at the very limits of current technology to recover this oil.

On the plus side, IF the oil can be recovered in such a way as to make economic sense (which means oil prices would need to remain very high and recovery costs would need to be contained) the reserve is huge, and the potential profits are huge.

I am betting that despite the enormous short term volatility in the oil markets, long term, prices are going to remain high, as demand is increasing and supply is diminishing. I am long on Petrobras.

2007 Dec 25 10:25 AM

[Smart Planner:]

Yes, this oil is very deep and costly to extract, however the know how is there: in the last few years Petrobras has already drilled many (20+) exploratory wells there and in the process gained invaluable knowledge on how to make it viable. It was already known as one of the best in the world for deep ocean drilling and considered one of the few that can actually explore oil at this depth.
That said, I don't own it directly (yes, thru ETFS). HAving lived in Brazil for over 22 yers, I am very aware of the political risks not to the company itself, which is very well run, but to the country's economy at large and its amplified stock on the local stock market in particular.
Think about the timeframe: a new president wil be in power before Tupi is productive. Lula has been great, but who is going to succeed him? Some of his closest and best allies have fallen in disgrace for corruption and mismanagement, so even if his team stays in power, that is no guarantee of future performance!...

2007 Dec 26 07:53 PM