(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. They fear that the price for the reserves and for the stock offering will be determined by the politics of a close race to succeed President Lula and not by oil field economics. Too low a price opens up Lula’s party and its presidential candidate to charges of a sweetheart deal that favors capitalists and foreign investors.
As of the first half of 2010 shares if Petrobras are the world 2nd worst performing oil stock in the world behind only BP (BP.) The stock was down 27% in the first half of 2010 to a 47% drop for BP.
After a second look at Jim’s post it looks to me like international drillers shallow or deep should do well. I like ESV.
Brazil should auction off the rights and settle on a Marktet price.
Christopher,
Yes, a huge part of global oil reserves are state owned. My point is that everyone knows that and it’s factored in to a large extent by people who own, for example, stocks in Russia and similar places – and now starting to be factored in by owners and worried potential buyers of PBR. But that’s why a negative surprise is more likely in store for shareholders of the non-state owned energy resources like those of Conoco, Exxon or Total when, at some point, they are gradually or suddenly put under increasing state political control and a large part of the upside potential value of their assets are effectively confiscated, taxed or otherwise controlled for the public benefit. Whether someone considers that a good thing or a bad thing, it’s seems it worth taking into account as a possibility of you’re a long term owner of non-state owned energy stocks. Then at least you’re alert and ready to bail if the stocks become overvalued in light of the probable political realities they’ll face. As you say, they’ll be hard pressed, but it hasn’t happened yet.
Yet another investment that requires predicting what the government will do. Stick with the drillers and servicers. Whether they contract with a national oil company or a privately owned one, contract they will. And they can’t be taken over at a whim as a result of some coup or election somewhere.
For those following BP and RIG, there is an interesting string of posts from oil industry workers and lawyers following Tiernan Ray’s post on RIG earlier today. Lots of disagreement but some great insights to explain (or undermine) RIG’s big move this week.
With all the cheering and flag waving going on about Petrobras’s future very deep wells far off the coast of Brazil I have not seen anything at all discussing their plans to contain any sort of a blow out. Now that we passed, hopefully, beyond the disaster in the Gulf I wonder how long until companies and governments will forget the tragedy in their eagerness to drill?
Regarding the interference of the Brazilian government in controlling Petrobras’s investments we have only to look at last week’s announcement by the state owned oil company of Venezuela. Their profits were down substantially from the year before while the number of “workers” continues to increase dramatically.
Kevinator,
As Jim has pointed out several times in the past, a LOT of countries have “got there first”, as in their oil is “state owned”. The “non-state owned” companies are certainly going to be hard pressed in the future, and the “state owned” ones are certainly not going to be the best to invest in given that politics is running them.
Given the shocking stats on declining global oil production going forward beginning next year (see recent little noticed DOE reports), I’ve been a fan of energy over all. But it’s a little unnerving to imagine that the partially gov’t owned and “managed” PBR may turn out to be the wave of the future trend rather than a “socialistic” outlier. It’s hard for me to imagine that even flag waving capitalist countries like the US won’t consider managing oil as a strategic resource when the massive economic effects of the real energy squeeze becomes apparent over the next few years. It’s a future risk for all energy investors who are looking at traditional market forces and property rights to determine value, I would think – maybe Brazil just got there first.
When the Brazilian government pulled the rug out from under PBR, that is when I lost interest in PBR.