Brazil and Petrobras Are Awash in New Oil 12 comments
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Last November, Petrobras (PBR), the state-controlled oil giant of Brazil, announced that it had found between 5 billion and 8 billion barrels of light, sweet crude in a field called "Tupi".
This field is wedged under a layer of salt deep beneath the floor of the Atlantic Ocean. Some geologists believe there is even more oil in the "pre-salt" fields.
Extracting oil from Tupi is a gigantic technical challenge. The salt has acted as a "perfect seal" to preserve the oil, according the director of Petrobras' projects in the pre-salt fields.
Other big-time integrated international oil companies such as BP (BP) and Norway's StatoilHydro (STO) have tried to make similar discoveries. They learned that these kind of fossil fuel deposits are deep below the surface and very hard to exploit.
Now all the major oil companies are caught in this mindless liquidation of commodity assets and hedge funds dumping shares like hot potatoes. Take a look at the one year chart below on the Energy Select Sector SPDR (XLE) to see the damage.
It sure looks very oversold, and after the impact of Hurricane Ike on production we might see this sector begin to change.
Back to PBR and Brazilian oil, which just keeps getting more interesting every week. Now it has been announced that its Lara discovery will add an additional 3 to 4 billion barrels of oil.
This is enough oil to supply the nation of Brazil with all it needs for the next 5 years. Most of Petrobras's planned investment in exploration and production of $65 billion over the next 5 years will be spent on the new fields.
Petrobras's president says that the company's plans for expansion are predicated on oil at $35 a barrel. He also was heard to say that the company has the financial strength to raise more debt if necessary.
PRB has over $22.6 billion in total debt right now, but its current operating cash flow (ttm) is over $24 billion, and it looks like that number is likely to increase in the years ahead.
Yes, there are some possibilities that the government might try to create a new, wholly state-owned, oil company to maximize its profits from the new fields.
But the leadership of both Petrobras and Brazil know that state-owned energy companies often times are big on bureaucracy and small on business acumen.
As The Economist magazine recently wrote, "Though Petrobras, subject to market discipline, is relatively lean, any new state company might quickly become puffed up by political appointees."
Thus, if it hopes to compete in the marketplace with the likes of PetroChina (PTR) and Total S.A. (TOT), it had better back away from mixing politics with the activities of big energy business.
Disclosure: Long PBR, STO, BP.
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This article has 12 comments:
i have been adding to pbr while it was down. bad idea? good idea?
is rig your favorite service?
It's impossible because it would violate the Second Law of Thermodynamics: www.gasresources.net/T...
Natural petroleum can only be formed at pressures above 30 kilobar which corresponds to a depth of 100 kilometers deep in the earth's mantle: www.pnas.org/content/9...
No biological molecule can survive in the mantle.
He will do this but under what model, that is still uncertain.However, Lula's biggest fear is inflation. He stated this in a recent interview with Bloomberg.
Lula meets with his finance Minister twice a week just to go over the inflation numbers.This could nean a silver linning in what new model Lula picks. Not theChavez model which is clearly confiscatory but also inflationary. Until we know why buy PBR. BG Group would be a better choice for the obvious reasons of lower exposure to the Santos mega filds and profits commig from elswhere around the world. The other choices are deep drillers and subsea systems companies but not yet PBR. It's value is only compelling at current pricing if Lula doesn't give it a big whack.
Now I'm not a CFA when it comes to stocks, but if you compare the Key Statistics, The Balance Sheet and The Cash Flow Statements of PBR vs. say ConocoPhillips (NYSE:COP), I'd personally rather own COP right now and avoid the political risk.
As Steve mentions in his comment, I'd want to wait until the Brazilian government announces its plans and intentions for PBR before I'd own a single share. Just my perspective, but a valid caveat right now.
One other things, if there are more bank failures and more Lehman's dangling on the cliff, some of the loans to hedge funds could be called in and more forced liquidations ensue. If that happens there would be more downside pressure on commodity prices, especially oil, gas and precious metals. Not for sure, but a real possibility.
Thanks for the link to that Great article !
Stay with the drillers because they will be unlikely to reduce their contract prices.
Just MHO.
Gas prices are 6-7 dollars a gallon, more than half the stations sell adulterated product, and gas is dirty less refined product.
Dilma, who is Lula's hand picked successor is also part of the "the pre-salt is ours," propaganda and they have been talking about a new state-owned company to mangae the oilfields and collect royalties to be paid in barrels of oil. Number as high as 50% have been floated.
Given the fact that this decades old company is facing huge risk with regards to the cost of extraction and the fact that it pays a dividend yield of next to nothing (That shows you the government doesn't care about shareholders) The govet owns about 40%/
Be careful here. The papers say we won't have any legislation untill after Feb of next year because the Congress in on vacation.
When Lula leaves the next Gov't could be much worse.