schin Posted November 28, 2010 Share Posted November 28, 2010 I haven't been into commodities -- but, with all the talk on SD and CHK. I wanted to hear people's opinons on Petroleo Brasileiro (PBR). It's around a 52-week low. Considering the growth in South America, I thought this was an interesting play, which requires research on my end. In the meantime, any thoughts from fellow boardmembers? Link to comment Share on other sites More sharing options...
Shane Posted November 29, 2010 Share Posted November 29, 2010 Well I know they have a major ownership by the brazillian government, which might give reason to some apprehension. I had a pretty big position a year or so ago, hoping that commidity prices would affect shareprice... this did not really pan out, and I sold that position for better idea's I had. If anyone has done some analysis on their financials I'd like to hear it! Link to comment Share on other sites More sharing options...
davidoosnk Posted February 7, 2015 Share Posted February 7, 2015 Anyone looking at this one right now? Looks like a pretty favorable risk/reward ratio in the $6 range... Link to comment Share on other sites More sharing options...
jawn619 Posted February 7, 2015 Share Posted February 7, 2015 I think at first glance it seems cheap because it's trading at like 6x p/e but dig deeper and i think you'll find that the risk/reward isn't so great on this one. If you look at their yearly cash flows, They haven't had positive free cash flow for like 6 years. :o They can't make money and they have a huge amount of debt that they use to pay their dividend. Link to comment Share on other sites More sharing options...
Pelagic Posted February 7, 2015 Share Posted February 7, 2015 PBR is definitely a tough one to value. I've followed it for a while and have certainly been tempted by how cheap it seems. If the accounting scandal and possible corruption was all there was to deal with, maybe it would be worth considering as those things will eventually be in the rear-view mirror. Add to that the collapse in oil prices and I have a lot of trouble valuing it. They had cashflow problems when oil was $100 a barrel, how will they fare now? The production capacity is there and it continues to grow but from what I understand its not cheap to extract what they're finding. I'm also concerned about how the Brazilian government uses PBR to fund spending but feel thats a risk you just have to deal with regardless of what else is happening with PBR. It's an interesting opportunity, there's definitely "blood in the streets" with this one. Earnings results should be interesting as it looks like they're planning on writing down $20 billion worth of assets. Who knows though, maybe with the new CEO in place the worst is behind them. Link to comment Share on other sites More sharing options...
wescobrk Posted February 7, 2015 Share Posted February 7, 2015 I'm at a loss to value this one but it's interesting to watch. For what it's worth, Morningstar continues to argue it's worth $21 a share. Maybe in 4 years when Brazil has a new party in office it can be ran rationally, but the past several years is a fascinating case study on how to ruin a company due to corruption and greed from politicians and bureaucrats. Brings to mind Charlie's too hard pile. Link to comment Share on other sites More sharing options...
Cardboard Posted February 8, 2015 Share Posted February 8, 2015 I would recommend you guys forget about that one. Drilling offshore, in Brazil or previously the land of hyperinflation and currency control, corruption... Not worth it IMO when you have good Canadian companies that have been decimated by the oil slide, having good management teams and good assets. PWT and LEG fit the bill perfectly IMO. Look at EV/boe/day, EV/boe of reserves and netbacks. If you believe that oil will trade at least at $50 U.S and factor in a 25% premium for the exchange rate then these companies will see bids in short order. If you prefer a major then I would take a close look at BP (although the Lukoil stake is a bit scary) and Total. Cardboard Link to comment Share on other sites More sharing options...
topofeaturellc Posted February 8, 2015 Share Posted February 8, 2015 If you think oil sands are long-term money good Petrobras is insanely cheap. Link to comment Share on other sites More sharing options...
davidoosnk Posted February 9, 2015 Share Posted February 9, 2015 I read somewhere that they have a fixed price of oil they sell to Brazilians which led to a loss when oil was high but might lead to enhanced profits now that oil is below this threshold. Also a lot of talk that they are too big to fail. I'm on the fence re. that. If they are too bit to fail in the sense of a Bank of America, then great, but of they are too big to fail like Fannie Mae (equity investors get hosed), then no thanks. This is definitely a tough one... Link to comment Share on other sites More sharing options...
Jurgis Posted February 9, 2015 Share Posted February 9, 2015 It is quite possible that they are too big to fail like Fannie Mae. And unlike US, if that happens, I doubt that shareholders would be able to sue and get much back. Link to comment Share on other sites More sharing options...
davidoosnk Posted February 10, 2015 Share Posted February 10, 2015 Jurgis I think it's within the realm of possibility too but do you think it's likely and if so why? Link to comment Share on other sites More sharing options...
RadMan24 Posted February 10, 2015 Share Posted February 10, 2015 Okay here are four things that are dragging down PBR: 1.) Horrible refining returns that is turning $1 earnings into .50 cents or worse. 2.) Fixed price/subsidiaries for the Brazilian people, which has cost the business quite a bit of money and no protection on price swings. 3.) Corruption/high project costs. The refineries being built are ridiculously over budget and no where near par in other parts of the world. 4.) Debt going through the roof. In a way, you can group all three of those concerns into one big overhang on the stock. What people seem to forget is the oil production & exploration side. It is quite remarkable the returns, reserves, and replenish ratios they have been able to accomplish over the past decade. 1.) Production can maintain at current rate for 9 years on proved reserves, moves up to around 14 years on proved undeveloped reserves. 2.) Deep water reserves and maturing fields generate significant returns on capital. 3.) Distribution and international businesses are cash flow positive and generate strong returns as well. 4.) If you look at this business without the refining side, it would not be worth $40 billion in market cap. Does the leverage and downstream business cut off that much value? The government of Brazil owns this sucker and controls it for its own social reasons. This has dented the strong returns on the E&P business. At today's price with the perfect storm, you are being compensated for the possibility of improving downstream performance over the next decade, continued strength in E&P, and a more balanced approach to leverage, which has increased quite significantly in the past 5 years. Some questions I have been debating in my mind: Does a banker CEO know how to run an oil company and does his past experience prepare him to handle crazy situations well and fix major problems? What are the catalysts to drive improved refining conditions in Brazil and what has caused the significant losses over the years? If this corruption scandal means more prudent capital allocation and project costs in the future, is it worth the potential risks associated with inexperienced top management and enduring a revamped culture? Shareholder interests are aligned in the E&P division and what are catalysts to shift that mentality into the downstream business? Link to comment Share on other sites More sharing options...
Jurgis Posted February 10, 2015 Share Posted February 10, 2015 Jurgis I think it's within the realm of possibility too but do you think it's likely and if so why? I haven't done enough due diligence to say something more precise. It was just impression I got from the recent history. It might be wrong. Link to comment Share on other sites More sharing options...
Pelagic Posted February 11, 2015 Share Posted February 11, 2015 Aswath Damodaran did an excellent write up on PBR today. "Put in brutally direct terms, if you were given a valuable business and given the perverse objective of destroying it completely and quickly, you should replicate what Petrobras has done in five steps." http://seekingalpha.com/article/2905596-how-low-can-you-go-doing-the-petrobras-limbo Link to comment Share on other sites More sharing options...
RadMan24 Posted February 12, 2015 Share Posted February 12, 2015 Aswath Damodaran did an excellent write up on PBR today. "Put in brutally direct terms, if you were given a valuable business and given the perverse objective of destroying it completely and quickly, you should replicate what Petrobras has done in five steps." http://seekingalpha.com/article/2905596-how-low-can-you-go-doing-the-petrobras-limbo It's a good article, but the author combines downstream with upstream operations. I think the main problems are corruption, sky high refinery and downstream project costs, and social agendas with capped gas/ importing oil. Link to comment Share on other sites More sharing options...
davidoosnk Posted March 17, 2015 Share Posted March 17, 2015 I bought some today at $5. Blood in the streets. Link to comment Share on other sites More sharing options...
ccplz Posted March 22, 2015 Share Posted March 22, 2015 In the long run, I believe that investing in this company is risky at any price, due its rampantly corrupt culture and untenable debt load. It is in thrall to the Brazilian government, and any extra capital it has on hand does not belong to the shareholders (as it should). Instead it goes to line the pockets of both the management and bureaucrats in the government, as well as to boost the popularity of local Brazilian politicians by reducing oil prices in Brazil. The economics of the oil industry has been deteriorating for the past few years, with oil becoming more and more expensive to extract from the ground. If we look at the oil majors, we can see that capital expenditure has been rising steadily for the past few years, whilst returns on invested capital have been decreasing. For example, Exxon Mobil’s return on invested capital decreased from around 30% in 2007 to only around 18% last year. By contrast, Petrobras’s ROIC was only 5%. Petrobras has focused on growth and market share instead of profitability, and consequently their margins have decreased, whilst capital expenditure comes to around 35% of revenues, significantly above the 15-20% invested by other integrated oil companies. Petrobras has generated negative free cash flow for the past 5 years. Instead, they have financed their absurdly high dividend with debt, and at the end of 2014, their debt load came to around $135 billion, more than any other oil company in the world. Their capital structure does not seem sustainable for the medium term future, and I have serious doubts about its ability to turn itself around, considering the ineptness of its management and board. It has not been operating like a viable business for the past 10 years. Of course, as a company partially owned and completely controlled by the Brazilian government, it will not go bankrupt, but I do not believe its equity is worth anything to shareholders. Link to comment Share on other sites More sharing options...
davidoosnk Posted April 2, 2015 Share Posted April 2, 2015 Sold 1/2 today for quick 30% + gain. Link to comment Share on other sites More sharing options...
jawn619 Posted April 3, 2015 Share Posted April 3, 2015 Sold 1/2 today for quick 30% + gain. Nice trade Link to comment Share on other sites More sharing options...
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