Petroleo Brasileiro: Now the World’s Fifth Largest Oil Company

When we raised oil price for calculation purposes to $100 a barrel on May 13, we raised estimated Net Present Value [NPV] for the common stock of Petrobras (PBR) to $75 a share from $61, adjusted for a 2:1 split. First quarter results according to Brazilian accounting reported the previous day chalked up strong gains in oil production cash flow offset by that old nemesis of price controls on refined products. Nonetheless, we project a high level of unlevered cash flow (Ebitda).

Projected cash flow capitalized at unlevered multiples (PV/Ebitda) related to reserve life (Adjusted R/P) supports present value of current oil and gas production. Separately we add a cool $100 billion for potential production in the newly discovered Pre-Salt petroleum province where the company has a dominant lease position.

In addition to the Tupi discovery announced last fall and Jupiter announced in early 2008, there may be a huge oil field several times the size of Tupi extending from the Carioca block. Since our analysis of two months ago, Petrobras stock has added more than $100 billion of stock market value to become the world’s fifth largest company according to Bloomberg. Investors willing to give up voting rights may be interested in the preferred stock with the same pro-rata ownership. Making up 42% of shares outstanding, the preferred was quoted most recently at 84% of the price of the common we use in our analysis.

Originally published on May 22, 2008.