Update Petrobras (PBR)
(I’m on vacation until August 24. Until then JubakPicks.com will operate on a reduced schedule of one or two posts a day. I’ll resume the full schedule when I return.)
Forget about news that Petrobras (PBR)–one of the stocks in my long-term Jubak Picks 50 portfolio– has made a new oil discovery off Angola with at least 500 million barrels of oil. Or that it is beginning production from the Urugua off-shore oil field this week.
The only discovery that counts for Petrobras shares is what price the Brazilian government will charge the company for as much as 5 billion barrels of deepwater reserves in the deep, deep water pre-salt deposits off Brazil’s South Atlantic coast.
As part of a complex plan to finance the development of the offshore fields such as the apparently giant Tupi field that Petrobras has discovered but now needs to put into production, the government plans to sell Petrobras 5 billion barrels of reserves. The company will raise the purchase price for the reserves through a stock offering. The new reserves would then give the company assets that it could use to back the debt or equity financing it needs to develop these new fields. The cost of that has been put at $224 billion by Petrobras.
So, in essence, the price that the administration of Brazilian President Luiz Inacio Lula da Silva charges partially state-owned oil company will determine how much Petrobras has to pay to finance this development. Estimates in the last week or so range from $5 to $6 a barrel—or about $30 billion—to $8 a barrel—or about $40 billion.
A higher price for the reserves would make it harder for Petrobras to sell stock to cover the purchase price—since investors would be getting fewer barrels of oil for their money. That would increase the number of shares Petrobras would have to issue to raise the purchase price. And that would, in turn, increase the dilution suffered by existing shareholders as a result of the sale of new shares.
The government has had difficulty settling on a price and the share sale has been repeatedly delayed. On June 22 Petrobras delayed the sale of shares until September. That pushes the offering dangerously close to the October presidential election.
That increases the risk of more political intervention—which makes already nervous investors even more nervous.
Update Transocean (RIG)
The best you can say about Transocean (RIG) is that it has a tin ear for public opinion.
The company’s public response to the Deepwater Horizon disaster in April has been to say 1) It wasn’t our fault and 2) We’re not on the hook for very much money.
Even if true, and there’s a good chance both statements are true, this isn’t exactly how a company that gives a damn responds to what is on a clear path to being the biggest oil spill and oil-related environmental disaster in U.S. history.
And to continue the company’s sure-footed response (if sticking your foot in your mouth is sure-footed, that is), Transocean declared a $1 billion dividend to shareholders as the environmental disaster was still unfolding.
Predictably the dividend payout has raised the wrath of U.S. politicians. Senator Ron Wyden (D.-OR) and 17 colleagues have asked the Department of Justice to launch an investigation into Transocean’s financial transactions casting the dividend payment as an attempt by the company to avoid paying claims arising from the spill. The logic of the Senators’ letter escapes me: If Transocean is found liable for a big payout from the disaster, its $1 billion dividend payout certainly won’t change the size of the judgment. Transocean generated more than $5 billion in cash from operations in 2009 and could raise billions more in the capital markets to pay any conceivable judgment.
The stock dropped $5.28 or almost 9% today on news of the request for an investigation by Justice.
Political grandstanding aside, Wall Street is busy at work trying to figure out how big a hit the company will take from the Deepwater Horizon disaster.
Sell Statoil (STO)
I’m selling Statoil (STO) on today’s bounce because the euro debt crisis has changed the medium-term fundamentals for this Norwegian oil company. As I wrote in my 12:30 May 21 post http://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ as hard as it is I think investors should try not to get caught up in panic selling during this market drop.
But on the other hand that doesn’t mean they shouldn’t sell anything.
OPEC cheats on production quotas, oil prices fall
After the recent rally in oil to $87 a barrel, an increasing number of OPEC (Organization of Petroleum Exporting Countries) members have started to cheat by pumping more oil than quotas allow. News today, April 19, that production from OPEC members increased 4.6% in March from March 2009 sent oil prices tumbling. As of 1 p.m. ET today the price of West Texas Intermediate crude had fallen 2.2%, or $1.84, to $81.40 a barrel.
Oil reached a high of $87.09 a barrel on April 6 but it’s been pretty much downhill since then. That day the U.S. Department of Energy predicted that U.S. demand will average just 18.84 million barrels a day in 2010. That’s still way below demand in 2005 of 20.8 million barrels a day.
Consumption in the 30 industrialized countries that belong to the OECD (Organization for Economic Cooperation and Development) will average 45.4 million barrels a day in 2010, according to the International Energy Agency.
Demand is picking up in developing economies such as China, Brazil, and India rising to 40.09 million barrels a day on average in 2010.
But because the United States is still the world’s largest consumer of oil, growth in developing economies won’t be enough to keep oil prices rising if demand from the United States (and other developed economies) has stalled. China, the world’s second largest consumer of oil, consumes only half as much oil as the United States.
The trends still point to $200 a barrel oil–even if when remains a bit unclear
Whatever happened to $200 a barrel oil?
Maybe it’s just been delayed in transit. A recession in the world’s developed economies can do that.
Remember Arjun Murti’s time in the sun when, back in May 2008, the analyst at Goldman Sachs predicted that oil would soon hit $200 a barrel? A number of other prognosticators weren’t far behind. T. Boone Pickens predicted that oil would hit $150 that year. Some guy named Jim Jubak in April 2008 called for $180 a barrel within two years in a column for MSN Money (http://articles.moneycentral.msn.com/Investing/JubaksJournal/WhyOilCouldHit180DollarsABarrel.aspx?vv=750 )
Just in case you haven’t noticed, all of us were wrong. Oil peaked at $147 a barrel in the summer of 2008 and then plunged to hit $35 a barrel by June 2009.
Let me rephrase that: We weren’t wrong; we were early. (All financial fortune tellers are told over and over again in their training at the Frogwarts School for Financial Wizards that you never, never, never forecast both a price and a date. One or the other. Never both.)
A little thing called the Great Recession killed global demand for oil. For a while
But none of the supply-side problems that lead me and others to predict $150-$200 per barrel oil have gone away. And as soon as oil demand rebounds with a global economic recovery, I think we’re going to be right back on the road to $150, $180, or $200 a barrel oil.
There are global trends that could scupper that prediction too, but I don’t think those forces are moving fast enough to change the price trend over the next ten years or so. (But I will outline those countervailing trend at the end of this post.)
