Two Exciting Brazilian Oil Stocks

Among stocks in our coverage, Petrobras (PBR) and BG Group (BRGXF.PK) offer exciting long-term participation in the world’s most important oil discoveries of the past three years. The finds are in the Pre-Salt formation of the Santos Basin offshore Brazil under water a mile deep. After the market decline of recent months, both stocks offer better entry points for accumulating shares. Though our buy ratings remain suspended amid tumultuous financial markets, we believe in the long-term appeal of energy investments.

Meanwhile, in a press release last week, Petrobras estimated recoverable reserves of 3 to 4 billion barrels at Yara (65% PBR, 25% BG). Combined with last year’s estimate of 5 to 8 billion barrels at nearby Tupi (65% PBR, 25% BG), the range of total recoverable reserves has a midpoint of 10 billion barrels. That is enough to support a million barrels a day from the ten platforms PBR has ordered for delivery in 2013 to 2016.

Estimates of Present Value include $102 billion in PBR and $24 billion in BG for the Pre-Salt off Brazil. McDep Ratios imply that market cap and debt is 0.58 and 0.73 times PV for PBR and BG respectively. Finally, six-year oil ended its uptrend compared to the 40-week average signaling a need for more patience in anticipating renewed price gains.

Originally published on September 16, 2008.

Comments

[Paul Killinger:]

Agreed. These are two terrific prospective energy investments. Assuming the world's economy doesn't tank so badly that oil companies have to give their production away again, that is.

2008 Oct 06 11:54 AM

[Steven Ward:]

BG is the better stock based on earnings from around the world and a strong diversification into NG. It will remain a question for sometime if the Lula Administration practices a severe confiscatory policy now or later.
One thing to bear in mind, with a global credit crisis, Lula maybe slow or refuse to do any changes that kill investment in Brazil's oil fields or Brazil itself.
On the other hand, whipping up nationalist fervor maybe an irresistable object and dumb things happen under that scenario.
On the whole, BG is the better selection.

2008 Oct 06 01:16 PM

[Steven Ward:]

Added note: yes I own BG, but it is not a major holding.

2008 Oct 06 01:17 PM

[Andy Abraham:]

Have you seen Richard Rainwaters new statement about Crude... he is buying again...a member of myinvestorsplace.com sent me a chat.. about it... take a look...He bought crude when it was $14 a barrel ...to run it up to almost $140... as a footnote... buying BG with Brazilean Reals... isnt there a currency translation that could be a loss since the US dollar is strengthening?

2008 Oct 06 04:00 PM

[AlexS:]

I thought BG was a British group. You know, British Gas. BG. I'm also a shareholder, although it's a little tough to get hold of the shares here in the U.S.

2008 Oct 06 04:18 PM

[Alan von Al...:]

"a million barrels a day from the ten platforms PBR has ordered"

Can't and won't happen, for several reasons. It's misleading to talk about barrels of oil. Think BOE barrels of oil equivalent, because it's going to be mostly sour gas and condensate loaded with sulphur and CO2. Consider that Petrobras has very little free cash flow, so they need Lula to finance construction, and Lula decreed 80% new local employment, new shipyards, new drydocks, newly trained electricians and welders, green rig workers, all unionized. Expect surprises when they try to launch and operate those homemade pipebombs after a long string of delays. But really the meat of the story is nonexistent reserves and BG's political involvement in Brazil.

I get tired of pointing out the obvious.

2008 Oct 07 07:50 PM

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Mar 18 06:41 PM