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"Buying Petrobras today is like having the opportunity to invest in Saudi Aramco 40 years ago," says Shawn Reynolds of Van Eck Global's Hard Assets Fund. Barron’s concurs that Petrobras (PBR) could become one of the world’s top three oil companies, and sees a potential 25% stock price gain this year. That’s after shares doubled to $70 since 2007, in light of Petrobras’ major oil find in 2006. Petrobras is so confident that its Tupi oil field contains five to eight billion barrels of oil - the largest find in 30 years - that it’s already contracted ships for drilling. Even if that’s priced in to the stock, there’s also the potential of yet three more major deepwater wells discovered nearby since.

It’s possible those three won’t actually be major finds, and Brazilian oil subsidies hurt Petrobras’ bottom line. Deep water drilling is three times more expensive than sand drilling, and Brazil isn’t yet a “pure net oil exporter.” At 14 times estimated 2009 earnings, its multiples are higher than rivals like ConocoPhillips (COP), ExxonMobil (XOM) and Chevron (CVX). But analysts who have been upgrading the stock lately say only Petrobras is sitting on not one but four major finds. Its premium, Barron's says, is deserved -  and a sign of things to come.

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Roger Nusbaum cautions that foreign stocks have become more risky, or less of a no-brainer, than they were a couple of years ago. Petrobras’ may be one of the riskier ones now, as its multiples have gone up remarkably in the interim. If oil does go to $200, Nusbaum thinks PBR is likely to rise with it regardless of its valuation. 

Kurt Wulff has an idea for those who missed this year’s run up in Petrobras since its major discoveries. (Wulff characterizes one of the discoveries, the Carioca block, as being possibly several times the size of the Tupi field.) “Investors willing to give up voting rights may be interested in [Petrobras] 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.” 

Jason Schwarz says Petrobras’ recent deepwater finds could yield 33 billion barrels of oil cumulatively. This contravenes the 'peak oil' theory - that the world is running out of oil. Incidentally, while Barron’s says the Tupi field could double Brazil’s oil reserves, Schwarz estimates it could triple them.

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This article has 31 comments:

  •  
    Oceaneering (OII) and Trico Marine (TRMA) are other great ways to play deep water oil. Both have extensive contracts with PBR. Those stocks are less extended.

    E. Roche (Freedom Mountain Investments)
    2008 Jun 29 01:04 PM | Link | Reply
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    PBR might be the best short in the world, if you have a little time!

    Oil will be $80 in 6 months...all the forces are against it...
    2008 Jun 29 01:20 PM | Link | Reply
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    The world may still have plenty of oil, but getting to much of it is becoming more difficult and expensive. Petrobras's Tupi field, which is under a miles-thick layer of salt, that itself is miles under the Atlantic Ocean, is an example of this. Eventually, as such new sources of oil come on stream (and as new technologies such as plug-in hybrids temper demand), oil prices may be lower than they are now. But since there are such long lag times involved in both significantly increasing supply and reducing demand, I am bullish on oil over the next five years at least.

    Since current oil prices haven't been priced in to a number of oil stocks, there are bargains there. Petrobras has great potential, but it's not one of the bargains at this point, IMO.
    2008 Jun 29 01:35 PM | Link | Reply
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    1. how many years before even the first wells produce oil and how long before we see a profit.
    2. regardless of the ethanol fiasco/looming disaster and understanding that we that for the sake of utility and expediency we will rely on oil for some years to come, fossil fuels are a counter productive way to view the future of world energy. the oil industry is dead. they just don't know it yet.
    2008 Jun 29 02:26 PM | Link | Reply
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    Petrobras is a govt. owned company under control of a left leaning govt. It is not Saudi Aramco. But that is besides the point.

    Oil find by Petrobras will cost $40-50 to extract. The bigger reserves are under salt layers which noone knows how to drill. Wait for the environmental groups to study this and they will be all over this.
    2008 Jun 29 02:38 PM | Link | Reply
  •  
    Lots of PBR naysayers in this thread. Ken Heebner loves this stock and calls it unlike anything he has ever seen before.

    Tell me, are any of you smarter than Ken Heebner?
    2008 Jun 29 03:39 PM | Link | Reply
  •  
    VSD,

    A few points are worth noting here:

    1) Brazil's president may come from a leftist background, but he has governed the country mostly as a pragmatic centrist.

    2) The government ownership of PBR is a feature, not a bug: it puts PBR shareholders on the same side of the table as the Brazilian government. As a PBR shareholder, Brazilian resource nationalism works to your advantage. Who do you think is going to get the lion's share of any new discoveries off the coast of Rio de Janeiro, Petrobras, or a foreign joint venture partner such as Respol? The question answers itself.

    3) The engineering challenges of the Tupi field are daunting, but most likely surmountable.

    4) Environmentalists? Brazil isn't the United States. Its *leftist* president is enthusiastic about drilling this oil. You think his political opponents on the Brazilian right are against it? There seems to be more pragmatism across the political spectrum in Brazil; unlike the here in the U.S., the idea of leaving billions of barrels of oil in the ground seems to have never occurred to them.
    2008 Jun 29 04:26 PM | Link | Reply
  •  
    Jake Blues,

    Ken Heebner is indeed a genius, and if memory serves, he bought PBR last year before it ran up 100%. I am not sure if he is still adding to it at these prices.
    2008 Jun 29 04:28 PM | Link | Reply
  •  
    Ken Heebner also owns Oceaneering (OII) according to the latest information available. He would probably own more if it were a larger cap company. But the smaller investor can get plenty.

    E. Roche (Freedom Mountain Investments)
    2008 Jun 29 04:50 PM | Link | Reply
  •  
    1. I like Ken Hebner, but he has also made bad calls.

    2. I'm not comfortable with the "like Saudi Arabia 40 yrs ago" call; as 40 yrs from now, oil will probably be cheap again because of new source fuels are cheaper.

    3. It will be many years before PBR can bring those new finds to market.

    4. PBR absolutely MUST have high oil prices to justify the huge cost of oil recovery at those depths and other technical challenges.

    5. At PBR's present P/E, there are likely many more attractive opportunities.
    2008 Jun 29 05:01 PM | Link | Reply
  •  
    Don't forget the sugar ethanol product. While the moronic "body politic" in Washington is on vacation the Brazilians will scream past everyone. They "get it", they got the drilling rigs, and our "addiction to oil" will continue. Meantime we are held hostage by the environmental cartel while Cuba prepares to siphon the oil out from under the USA in the Gulf of Mexico. The chickens have come home to roost!!!!!
    LONG PBR, XOM
    2008 Jun 29 06:34 PM | Link | Reply
  •  
    PS-
    Lest I forget......the Iranians will get wacked by the Israeli airforce and that should make tanker navigation in the Straits of the Middle East a little interesting too......................

    2008 Jun 29 06:55 PM | Link | Reply
  •  
    Unfortunately, the oil will not flow in large quantities for many years. There is no need to invest right now. I do not want to wait ten years for earnings to surge. For young investors, buy and put away and forget for ten years. The rewards will be great. For us old folks, we need a quicker payoff.
    2008 Jun 29 07:15 PM | Link | Reply
  •  
    •  • Website: http://www.cwsx.org
    Tupi is a gas play. Barron's is probably right about another run-up in share price, but Petrobras will never be a net crude oil exporter.

    seekingalpha.com/artic...
    2008 Jun 29 07:47 PM | Link | Reply
  •  
    To counter an earlier poster - subsalt drilling is now well proven and taking place in the Gulf of Mexico, and what they are finding is big but the "majors" are playing it close to the vest.
    Petrobras is a player there, as well. 3D seismic and depth migration has truly revolutionized oil exploration. There are more things under the Earth, Horatio, than are dreamt of in your Philosophy. -w/apologies to the Bard.
    2008 Jun 29 08:29 PM | Link | Reply
  •  
    Who knows what the rising taxation is going to be on PBR's windfall profits?
    2008 Jun 29 08:42 PM | Link | Reply
  •  
    "Jason Swarz says Petrobras’ recent deepwater finds could yield 33 billion barrels of oil cumulatively. This contravenes the 'peak oil' theory - that the world is running out of oil. Incidentally, while Barron’s says the Tupi field could double Brazil’s oil reserves, Schwarz estimates it could triple them."

    What Jason Swarz may not know, and many don't, is that the optimistic potential for Brazil is less than one year of world wide consumption. What the world would need to prove Swarz right is a 500 billion barrel field. Tupi and Carioca are but drops in the bucket relative to the giant fields of Saudi Arabia, which are now in decline. The world burns 30 billion a year, the US burns 22 million barrels a day. The US has 5% of the world's population, and burns 25% of the world's oil. Extraoplate this to China, India, the Asian tigers, etc. and overlay this with growth rates in these countries. Not only that, but watch the growth rates in the Middle East. Those countries are breeding like rabbits and are now keeping much more oil to satisfy their own populations.

    2008 Jun 29 08:58 PM | Link | Reply
  •  
    let's see, Brazil has a left leaning President a surplus and a strong currency.

    the US has a right leaning President a deficit and a patheticly weak currency.

    Now what was the point?
    2008 Jun 30 12:18 AM | Link | Reply
  •  
    I agree with the above poster. I don't care about any facts...peak oil is here. Even if there are 20-30 million more barrels/day of oil pumped next year or the year after, I still won't believe it.
    2008 Jun 30 12:33 AM | Link | Reply
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    I think a lot of people have been hiding out in stocks like pbr to avoid the bear market. these stocks including the etf ewz cannot defy gravity much longer. Check out the double top on EWZ @ $102. They will fall with all the rest!
    2008 Jun 30 02:40 AM | Link | Reply
  •  
    zenalgorithm - peak oil simply shows that when the easy oil is gone (roughly half of a field's capacity), production will decrease gradually because of the increased difficulty of extraction. Peak oil means the oil is half gone, and will vary from field to field.
    Even the most pollyannish sunshine pumper will admit that the difficulty and cost of extracting oil is increasing rapidly worldwide. This article actually fits perfectly into the facts of peak oil: oil will be increasingly difficult (and expensive) to extract.
    2008 Jun 30 04:22 AM | Link | Reply
  •  
    DaveinHackensack-

    Heebner said this on CNBC last week.
    2008 Jun 30 07:04 AM | Link | Reply
  •  
    Arguing that it will take many years and be much more expensive to extract the oil that PBR has rights to should not prevent you from investing in PBR because by the time the new oil hits the market the price of crude will probably be meaninfully higher than it is today. Thus, they will still make good money with an exceptable ROI.

    If you think crude will be worth less several years from now than tell please expain your thesis to me because I don't get it.
    2008 Jun 30 01:41 PM | Link | Reply
  •  
    Oil, oil everywhere, but not a (new) drop to (refine) drink in the U.S.!
    2008 Jun 30 02:26 PM | Link | Reply
  •  
    oilismastery.blogspot....
    2008 Jul 02 01:53 PM | Link | Reply
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    •  • Website: http://www.cwsx.org
    "Buying Petrobras today is like having the opportunity to invest in Saudi Aramco 40 years ago," says Shawn Reynolds of Van Eck.

    Hah. Here's what happened if you invested in Aramco:

    1956 Standard Oil of New Jersey (now Exxon) and Socony-Vacuum Oil (Mobil) confirms scale of Ghawar, world's largest oil field.
    1966 Tankers begin calling at offshore crude oil loading platform.
    1973 Saudi Government acquires 25 percent interest
    1980 Saudi Government acquires 100 percent
    2008 Jul 03 01:35 AM | Link | Reply
  •  
    I have done quite a bit of reading on PBR and deep water drilling technology. The technology is in place. The oil will start flowing within a year. Recently, PBR's PE was ranked at 22. Now, it is more realistically being rated at 14, and probably is closer to 11 right now based on Brazilian analysts' earning estimates for this year. Regardless of plug-ins, oil is going to be around to produce all the plastics, truck fuels, fabrics, etc., etc., etc., forever. The price of oil is only going to keep climbing. If demand drops, the price will only rise to cover the higher costs of production required for the higher per barrel capital investment. Shale oil from Colorado's Western Slope is going to cost at least $300 a barrel after refining. Who is going to buy $300 per barrel oil? 33 billion barrels is more oil than the known reserves in the entire U.S. Brazil's Pres Lulu De Silva recently met with Castro and joined China, Venezuela, and Japan in financing the drilling of the Gulf of Mexico, so PBR has a piece of that pie. Then consider that PBR has 80% of all the world's deep water rigs under contract for the next 10 yrs. That is 80%. The U.S. couldn't drill in the Gulf if they wanted to, no matter how loud the conservative talk show hosts whine. The reason the U.S. is not participating in the Cuban Gulf is because of 50 yrs of crappy conservative fear-driven foreign policy towards Cuba.
    2008 Jul 04 10:51 AM | Link | Reply
  •  
    NEWS FLASH!

    The eleventh annual report of Amerada Corporation (now Hess) shows a loss for 1931, of $1,701,647.81 Net production of crude oil was 5,145,386 barrels.

    The average price of crude oil in 1931 was $0.60 against $1.23 in 1930.

    "General conditions in the oil industry are still far from favorable, but progress has been and is being made toward bringing about a healthy balance between supply and demand, particularly in the producing branch of the industry. There is no reason to believe that the acute over-production of crude oil existing during the last few years will be a permanent condition and your directors are confidently looking forward to a not very distant day when a low cost producer of crude oil can make a satisfactory profit.

    (The above was copied from an actual Amerada annual report).

    Where in the hell were the liberals with "Big Government" bail out programs? No where, thank God! Amerada managed to work its way through a tough period by the grace of good management, guts, determination, and the ultimate salvation, WW-ll. Of course, FDR would have liked to have taken credit for this, along with ending the depression, never mind the war economy!


    2008 Jul 07 07:48 PM | Link | Reply
  •  
    Ken Heebner is a trader. He bought the brokerages in early 2007 and dumped them a few months later. He may not even be holding Petrobras at this point.
    2008 Jul 08 01:29 PM | Link | Reply
  •  
    Heebner raves about PBR every interview. I have heard him twice say that PBR may become the biggest stock in the world. Trust me, he's still holding it.
    2008 Jul 10 03:48 PM | Link | Reply
  •  
    anyone shorting oil or thinks it's going below $100 is sadly mistaken
    this is your last chance to buy at these sale prices in the $120-130 range
    2008 Jul 20 01:38 PM | Link | Reply
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