Disappointment on Petrobras (PBR). Although it’s disappointment that investors will ultimately get over.
The government is charging Petrobras more than expected to buy 5 billion barrels of oil reserves. (Pre-transfer the company has proven reserves of 15 billion barrels.) The price of $42.5 billion, to be paid in new stock, works out to $8.50 a barrel. That’s more than the $7.50 oil industry analysts had been expecting.
And since the price determines not only how many new shares the company will issue to the government, but also how many shares it will have to offer to minority shareholders in a related rights offering, the higher price works out to a lot of dilution for existing shareholders. The company will sell $32.5 billion in shares in that rights offering.
The total of $75 billion is more than three times larger than the $22.1 billion raised in the Agricultural Bank of China initial public offering. That offering is the largest IPO ever
The deal with the government is part of a complicated financing package. The government gets a bigger stake in the oil company and its recent finds in the deep waters of the South Atlantic and in exchange Petrobras gets 5 billion barrels of reserves that it can use to back addition loans.
That’s not exactly a minor benefit since the company has estimated its capital spending needs at more than $224 billion over the next five years.
But this is exactly where it gets tricky.
Private investors worry that the government is already pressuring Petrobras to make big investments in the lower margin refining business because that fits the country’s need for more domestic production of refined petroleum products. In June the company announced that it was increasing its capital spending on refining to $74 billion from $43 billion over the next five years.
A strange decision from a company which can invest every dollar of capital it can raise in developing higher margin, recently discovered deepwater oil reserves.
It doesn’t help that this financing deal will increase government ownership in Petrobras and the government’s potential influence. Besides getting more shares outright, the government will have the option to snap up any shares in the rights offering that aren’t bought by private investors.
All this has led investors, including some of the biggest of the global big boys such as George Soros’s Soros Fund Management and BlackRock, to sell their Petrobras stake. Soros Fund Management, for example, sold all of its Petrobras stock in the second quarter.
In the short term this deal has certainly depressed the stock. Petrobras is down 25% this year as of September 8.
In the long term, the price of stock will recover from this dilution and these worries about government influence as long as the reserves in the South Atlantic prove out to be as rich as projected. There just aren’t that many big new oil fields in the world anymore.
It just may take a while.
Full disclosure: I don’t own shares in any company mentioned in this post in my personal portfolio.
Thanks Ed and flgator.
Although MSFT does have some new products, but did not seem translate into more revenues. They need to come up with some blockbuster products.
windows xp that is.
MSFT has some great innovations….just can’t seem to make money on them:
1). Zune…better than ipod and offers $15/month for unlimited songs
2). X-box….and coming out with Kinetics (motion based accessory to x-box that uses facial recognition and body movement in lieu of the wii controller) on november 4th. x-box is also trying to bridge the gap between TV and computer….it acts as a media extender so you can watch videos/pictures/music from your computer on your tv, surf the internet, watch netflix, x-box live, etc.
but they have failed big time on bing, windows mobile,
i see a big corporate upgrade coming soon to windows 7 and the latest office offering. i work for a 100-person company and we are still rocking ’97 and office 2000.
what about NE (Noble) as a play on PBR’s deep water drilling? the stock is definitely depressed and they have a lot less debt than DO & RIG….and their exposure is more international than US as far as fears of increased regulations.
yx,
Your fears are well-founded. While I am still not sold on “cloud computing” for operating systems, I do think it MIGHT have some long-term potential, at least in theory (until the hackers deliver us into a whole new era of virus pain).
That said, Mr. Softie has only one source for the overwhelming majority of it’s revenues: operating systems. The only innovating they’ve been doing is in value-added (read: non-profit) areas such as Bing.
While I’m not suggesting they will go out of business, I can see them in a long-term death spiral unless they get to doing some major innovating real fast.
P.S. I do think Windows 7 is their best o/s yet.
Ed:
I know you work in IT area. I’d like to hear your opinion about MSFT.
Morningstar recently listed it as one of the top stocks to own. But I just recently started to think that MSFT may has started a long-term decline. Reason (1) with all the new things going on in the tech world, the days of Microsoft’s products maybe numbered; (2) It’s hard for companies to truly replace a great CEO. Bill Gates may still be very much aware of the company’s business, but it’s never the same as he actually manages it. That negative effect takes years to show up (think GE). I used to consider it as the Coke or McDonald for tech world (that’s why I own it), but suddenly just last few days ago scary thought popped up. Because every day so many new things coming out the tech world and MSFT seems have nothing to do with it! What do you think?
I ran into this article about current market. It said the market is actually pretty high if you measure it by tools other than PE. Although it’s interesting to know other tools, I think it misses one important factor: international sales. US companies are increasingly expand overseas (S&P 500 gets 40% from foreign sales) and it will offset US slump. What’s every one else’ thought?
http://articles.moneycentral.msn.com/Investing/MutualFunds/is-the-smart-money-buying-now.aspx?page=all
Jamba,
ECA is too levered to Naty Gas. Take a look at Jim’s old pick DVN. They have a lot of good assets and a growing liquids portfolio. They have a good stock buyback and are lowering their leverage. I also like CXO for a smaller cap choice. I think PBR is a non-starter for profitable oil/gas investments.
Why not stick with companies with a stable and friendly govt. like Canada. CVE or ECA would be good choices.
Jim,
I recall you old recommendations to buy PBR some time ago, which I followed and made some rather quick $. However, with all the government involvement in PBR, why not to look at two other giants of gas and oil industry – Gazprom and Lukoil? At least, their oil and gas resources can be reached without BP-type disaster, they are now heavily involved in exploiting Iraq’s resources.
Is there something fundamentally wrong with those two companies that you are avoiding them by all means?