Petrobras (PBR): "We don't give a crap about posting a profit"

Your author read this report this morning from Mercopress and his memory was jolted. Here's how the note kicks off:

Tuesday, July 26th 2011 - 13:29 UTC

Petrobras plans to double oil output by 2015 and exit debt market in 10 years

Brazil’s government managed Petrobras said its plan to more than double oil output will boost cash flow and eliminate the need to tap debt markets after about 10 years. Profits from oil sales will be enough to cover operating and debt costs starting in about 10 years, said Chief Financial Officer Almir Barbassa.

For sure that sounds smart cos going overboard with debt and all that isn't a good thing, correct Mr. Obama? But the flipside to that is a Petrobras (PBR) that's not going to care much about bottom line profits while it gets its burden lowered. Which reminded me of these words posted in 2008 and then August of 2009 by yours truly:

"It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.
"So I'm still neutral on Petrobras stock. I'm reasonably bullish on the company and what it will do for Brazil in the long term future, but because shareholders are not the raison d'etre of PBR there's no reason why you or I should prefer it over CVX, COP, XOM or whatever other big oil strikes your fancy."

The original piece was entitled, "Petrobras: Great for Brazil, not so great for shareholders". So check how PBR has done in relation to big world oil plays like XOM and COP on that chart above and consider that a dumbass spoutmouth blogger got it right while the dude in NYC that got his new Porsche funded by you was insisting on the utter future crunchy wonderfulness of PBR all that time.  And DYO freakin' DD one time.

Alan von Altendorf on oil companies and the SEC (update)

Good news from yesterday's post.

Felix Salmon picked up on the story and wrote an article here. Then SinkingAlpha jumped on first Felix's post and then decided to run the AvA article on site (as a three parter). It's currently on the front page main headline, has been chosen as an editor's pick and is getting some smart comments from pretty knowledgeable oilheads.

It's also found its way to The Business Insider, where Joe W completely misses the point (he's usually better than this). Probably didn't bother to read the article. If you haven't read AvA's most excellent exposé of the oil industry, get your copy right here (in PDF from the author's website).

Must read on oil

If you only read one article about the oil industry this year, the report linked right here has to be it. Utterly, totally, completely and absolutely unmissable. Not only is it intelligent and über-insightful, but it's a highly entertaining read, too.

Alan von Altendorf is a smart guy when it comes to the oil industry. He runs an independent oil consultancy out of Houston called CWSX and knows his patch. Several moons ago, I got lucky and hooked up with AvA while covering the subject of Petrobras (PBR). At the time of the mega pre-salt hype PBR was plainly getting way expensive and I said so. When the idiot sheep screamed their denials, AvA stepped up with solid science and arguments that agreed with the overbought call. He was proved very very right.

Anyway, to the point. He's written a new, free access paper that blows the lid off the new SEC rules and eviscerates the oil industry, version 2009. I cannot praise this paper highly enough and have already learned a whole bucketload about the scams going on in the oil biz during my first couple of scans at the piece. I'll be sitting back and absorbing every word later. You should too.

Here's the intro section to AvA's note. Here's the link again, so go get your own copy.

This is a long article on the subject of oil & gas reserves and due diligence.

My purpose is to alert you to revision of SEC Regulation S-K and Regulation S-X effective January 1, 2010. Concealed in a handful of benign new regs is a financial truck bomb that's going to blow away "proved reserves" as a meaningful metric of oil company assets.

Old definition: Proved Reserves are those quantities which can be estimated with reasonable certainty to be commercially recoverable from known reservoirs under defined economic conditions. Proved quantities arelimited by the lowest known hydrocarbon as seen in a well penetration unless otherwise indicated by definitive geoscience, engineering, or performance data. Seismic data alone is not sufficient to define fluid contacts. Undeveloped locations may be classified as Proved in undrilled areas of a reservoir that can be judged with reasonable certainty to be commercially productive.

New definition: Industry is no longer constrained by the criterion of certainty. An operator can book incremental proved reserves from planned enhanced recovery projects (gas injection, acid fracturing) based on a pilot project. Coal seam gas, bitumen, oil shale and other unconventional resources can be booked as Proved Reserves. Estimated reservoir properties in the aggregate is a departure from the old rules. The new SEC definition does not require that an analogous reservoir has to be in the immediate area or in pressure communication. Seismic analysis and reservoir models are sufficient to book Proved Reserves.

Hold on to your shorts, it gets worse.

Under the new SEC rules you don't have to drill a well and actually produce oil. An operator can establish levels of lowest known hydrocarbons and highest known oil through "reliable technology" other than well penetrations. It doesn't have to be 90% reliable or widely accepted by industry peers... [more]

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Petrobras (PBR): And now they begin to believe me

On September 7th 2008, Petrobras stood at U$44.44 a share and your humble correspondent wrote this article called "Petrobras: Great for Brazil, not so great for shareholders" that finished up with this conclusion:

"It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

"So I'm still neutral on Petrobras stock. I'm reasonably bullish on the company and what it will do for Brazil in the long term future, but because shareholders are not the raison d'etre of PBR there's no reason why you or I should prefer it over CVX, COP, XOM or whatever other big oil strikes your fancy."

Cut to August 31st 2009, a share price 10% lower than a year ago at U$39.64, and the latest news from PBR.

Aug. 31 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva unveiled a plan to increase state control of the oil industry, proposing regulations to help the country become one of the world’s 10 largest oil-producing nations.

....................

Petrobras common shares tumbled the most in six months as the company said it may sell new stock to help finance its exploration. The plan raised concern among some investors that the government is seeking to increase its stake at the expense of minority shareholders.

Any further questions?

Brazil earnings snippets

Petrobras (PBR) reported a quarterly profit of R$5.82Bn. This is down from the 1q08 R$7.24Bn but just beat out analyst forecasts of R$5.71Bn average. So kind of ok for PBR, but.....

Pao de Azucar (PCAR4.sa) brought hom an excellent quarter of R$94.9m, which beat out the Bloomberg forecast average of three analysts of R$75.8m. The most interesting feature of the number is that Pao de Azucar is Brazil's biggest food retailer and reports strong sales for 1q09. The shares are up slightly in early trading.

As for an angle on this retail sales buoyancy in Brazil, how about are old friend Mercado Libre (MELI)?. Definitely not a recommendation but simply a place where you might want to do further DD.

UPDATE: Bloomie also has a report linked here on Petrobras company comments on its results, with the CFO talking 'cost overhang'. Good background.

Cam Hui on Ken Heebner

Over at 'Humble Student of the Markets' and linked right here (go visit), Cam Hui takes a good, hard look at the recent record of fund guru Ken Heebner and finds him wanting. Quite right, Cam. I have fond memories of Heebner at this time last year when I was shouting "short PBR" (that got me into the London FT I shouted so loud) and people would point out that I was taking a contrary position to the legendary Ken. And the rest, as they say, is history.


Now for a short Ottotrans™: This is what Cam Hui (obviously a gentleman) says:

"Ken Heebner has a bottom-up driven investment process but takes big macro bets as a result of his bottom-up analysis. This style can work well when the economy is showing a trend, but I believe that Heebner tried to call the turning point a little early and got hurt."

And this is how Otto (obviously less so) translates it:

"Any dickhead looks good in a bull market."

DYODD

Heebner's CGM Focus Fund track record

(click to enlarge)

Argentina: The Merval Index changes its name.....

.....to "The Tenaris Index".

Chart courtesy of here

Here's a new chapter in the ongoing saga we know as 'Only In Argentina'. Every quarter the headline Merval index of the Buenos Aires Stock Exchange (BCBA) changes its composition. Normally the bigwigs at the BCBA change the percentage weighting of the companies on the list, and sometimes they add or take away companies.

The new composition starts tomorrow (the beginning of the 2nd quarter) and as well as removing three minor-weighting companes from the index (Mirgor, Molinos Rio and Aluar) the sages have decided to raise the weighting of seamless tubemaker Tenaris (US-listed as TS) from 35.22% to 46.48%. Or in other words, nearly half the index is now dependent on a foreign company*. Add the 13.69% weighted to second placed Petrobras, another non-Argentine entity, and over 60% of the supposedly Argentina index is made up of two non-Argentines that happen to do a minor part of their business in the country.

How Argentina still manages to get a seat at the G-20 summits is quite beyond me.

*Sorry guys, we've been through this before; whatever Argentines might try to tell you Tenaris is most definitely not an Argentine company. I've won money betting on this line item.

News roundup

Ask any Argentine about "placas de Cronica": A national institution

In Argentina, Interior Minister Anibal Fernández responds to the recent media circus cooked up by TV stars (TVland holds the people who truly set the the agenda in the land of estilo no sustancia) and says that Argentina "is the safest country in the region". IKN agrees, but also assumes that Fernández is referring to the region East of Chile and South of Bolivia/Paraguay/Brazil/Uruguay.

In Peru, the nation's inferiority complex with Chile is a generous and unending source of political capital for its pathetic and vomitworthy ruling class. The Toledo gov't (pre-Twobreakfasts) is the one that made the Free Trade Agreement with the USA happen, but now ex-PM of the Toledo era, Carlos Ferrero, says that the brand new FTA with Chile "damages the independence of Peru". Your humble correspondent is confused about this; how can you damage something that was smashed into a thousand pieces years ago?

In Brazil, Petrobras (PBR) watched the absurd trick Citigroup (C) pulled with its leaked "we're making a profit" documents and thought "hey! cool! let's do that too!". Unfortunately for PBR, unlike the anglosaxon world Brazil actually has a regulatory body that does some work occasionally and now the episode is being investigated. Market Memorandum tells you more on this link.

Petrobras (PBR): Reiterating a call

Top story on Bloomie's LatAm page today is this one linked here, which tells how Petrobras (PBR) is going on a cost-cutting crusade. Here's how Carlos Caminada and Jeb Blount start their report:

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Jan. 26 (Bloomberg) -- Petroleo Brasileiro SA, Brazil’s state-controlled oil company, will seek to cut costs by as much as $4 billion annually to prevent debt from swelling after the company announced a $174.4 billion five-year investment plan.

Reducing costs by that amount in the next two years will be a “big challenge,” Chief Financial Officer Almir Barbassa said today at an event in Rio de Janeiro. Petrobras will seek to yada yada continues here

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So this gives a nice opportunity to point out what woz writ by your humble correspendent in this note way back on September 5th (which, as a sidebar, also noted the hundreds of billions of dollars PBR would need to invest going forward):

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It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

So I'm still neutral on Petrobras stock. I'm reasonably bullish on the company and what it will do for Brazil in the long term future, but because shareholders are not the raison d'etre of PBR there's no reason why you or I should prefer it over CVX, COP, XOM or whatever other bigoil takes your fancy.

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So let's see how PBR has got on versus CVX, COP and XOM since that time:

Nuff said.

Bottom line: When you see PBR "cutting costs", one of those will be not leaving money on the bottom line, too. To risk labouring the point, if you have a state-run megacompany and you have the choice between taking out debt and paying out dividends to foreign investors, the decision takes about half a second to make. IKN is still neutral PBR.



PS: Check out this five year comparative between Brazil's Vale (RIO) and Petrobras. Another eye-opener. Works just as well on a six month period, too. Think about it.

Codelco to invest U$2Bn in 2009

This note from BN Americas really rams home the difference between a nationalized company and a private company. Chile's Codelco, the world's largest copper producer, will match 2008 capex next year to the tune of U$2Bn. In the words of big cheese José Pablo Arellano;

"The investment plan is comparable to the one last year.....We expect to go ahead with a vigorous investment plan next year in spite of this difficult situation"

Or in other words, while the rest of the sector tucks, trims, cuts and slashes spending, Codelco rolls on as usual. Y'see, the whole mindset of a country-controlled company is different. Bottom line profits come down the list of priorities (as long as the company adds to GDP and pays its tax and royalty bills the State won't moan so very much). In the case of Codelco it may be a hypothetical for you, dear investor. However here's an extract from something I wrote in this post back in early September about Petrobras:

It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

On rude awakening later.....


.....so with Petrobras due to spend $20Bn or so in Capex next year, don't expect the company to leave much for dividends next year. Not with oil at $50, anyway.

But the funniest thing now is listening to the 15,000 or so professional economists registered in the USA. Due to the total failure of everything they've taught and been taught for the last 15 years, suddenly nationalization is good, beneficial and acceptable. Have you noted that phrase "counter-cyclical" being used more often in polite society, too? So expect Chile's Codelco to get plenty of praise for forging ahead with its expansion plans. And expect analysts to concur with PBR's vision for adding GDP growth to its parent, Brazil. But don't expect a single good word for Venezuela's PdVSA or Bolivia's YPFB or Ecuador's PetroEcuador. I mean...waddya think we are....a buncha of commie bedwetters?

When Bloomberg Brazil pumps, the world dumps. So will it work the other way round?

When Petrobras was the bloated beast earlier this year, chief amongst cheerleaders was Bloomberg news. So now that Bloomberg is putting the boot into PBR, my innate contrarian nature is screaming "buy PBR!" at me.

PBR reports tomorrow, BTW. Here's the Bloomie hackjob.

LatAm commodities are now just one big sector

The squealing is coming from all sectors and all countries this morning.

Oil down (Therefore Venezuela, Ecuador and Brazil are toast)
Metals are down (Therefore Chile and Peru are toast)
Soft commods down (Therefore Argentina and Brazil are toast)

So it occurred to me to look at a few stocks that cover both LatAm and commodities of various shapes and sizes. What I saw was a real eye-epener:

This chart compares the ten day stock price performance of Southern Copper (PCU, the black line), soybean play Bunge (BG, the red line), iron ore and other metals play Vale (RIO, the blue line) and Brazil's Petrobras (PBR, the region's biggest traded oil play).

What this shows is that current share price action has nothing repeat nothing to do with real market forces like supply, demand etc. It shows that political risk factors are being totally ignored. It shows that the market has no idea about what it is truly buying or selling. This because the only thing that can be concluded from this chart is that all commodities are but one thing, and according to the crazy price action and the crazier people that drive it, all the LatAm states involved with their production are just one big, homogenous risk.

You telling me that chart up there is logical? Because if so, my investment recommendation to you is simple. Don't trade stocks ever again. Put your money in a time deposit fund and learn to surf, or play piano, or join a salsa dance class or something. You need a different pastime. However, if you agree with me and see the asinine way in which commodity stock are being treated right now, maybe you'll think about finding the arbitrage advantage amongst all that mess.

Personally, and as an example, I think PBR at U$28 is a great price now (if you take a medium-term perspective); It may go lower (re-test $25?) but oil has a profit floor these days, thanks to things like Canadian Oil Sands. And when Obama gets in, do you really think OPEC will keep the spigots wide open? Think about it.....

The Ecuador oil dance continues

Correa: Surprisingly good at the yo-yo

In the last couple of years, President Studmuffin Correa has managed to tame nearly all the main foreign influences in Ecuador. From the ongoing threats of kicking out "illegal" debt paper to the actual kicking out of the US military at the Manta air base to taking none other than Carlos Slim to the brink before getting a better cellular phone deal for the state to the ongoing fear and nervousness he creates in the nascent mining sector.

All except for one. To say Ecuador depends on oil is a bit like saying there's a small problem with the world banking system. With ongoing revenues from oil Ecuador as a country would shut down in about a week, and the foreign oil players there sure do know that. Every time Studmuffin comes on as the tough guy and tries to play hardball with the oil companies, he gets the same reply:

Studmuffin:"We're going to raise the windfall tax to 99%"
Oil Companies: "Screw you."
Studmuffin: "Ok let's negotiate on the point."
Oil Companies: "Screw you."
Studmuffin: "If you don't like it, you can leave."
Oil Companies: "Screw you."
Studmuffin: "I'm not joking guys. Honest."
Oil Companies: "Screw you."
Studmuffin: "We must renegotiate contracts right now. There's no more time."
Oil Companies: "Screw you."
Studmuffin: "We'll slap fines on environmental damage starting now."
Oil Companies: "Screw you."
Studmuffin: "If you don't up investment and production, we're kicking you out."
Oil Companies: "Screw you."

That last one is the latest episode. Last weekend Correa came on all strong, surely feeling bolstered by the excellent win in the referendum on the 28th. He told oil companies that they must invest and get production up or risk being kicked out. Today, President Lula (supposedly from allied Brazil, but bizniz iz bizniz dudes) plays messenger boy to big Ecuador player Petrobras, saying that they might pull out of Ecuador.

The plain fact is that Ecuador can't kick the oil boys around like the other sectors. If it tried to take over or was handed the production from the private company fields, state coffers just could stretch far enough at the moment to cover the necessary capex, opex and investment needed to maintain the fields. And then there's the brain drain factor, as Ecuador just doesn't have enough beautiful oil minds to cover all bases. In short, the oil boyz leave and Ecuador goes down the toilet, go straight down toilet, do not pass go, do not collect even a couple of hundred dollars.

So eventually Correa has to climb down a bit. My best guess is that the two sides will come to some kind of longer term deal before the end of the year, but it's going to have to suit both sides. On the oil side, they'll demand and get continued excellent gross profits. On the Correa side he'll demand and get a deal that wins a bit more for Ecuador while bringing long-term stability and is a face-saver, as ongoing ego enlargement is vital in LatAm politics.

How the miners must wish they had the same muscle.....................

Petrobras (PBR): great for Brazil, not so great for shareholders

Away from this blog over the last couple of days I've been looking at Petrobras (PBR), and there are some conclusions we can draw from looking at one simple ratio chart.

First, though, the basic price chart. Here it is from 2007 to date.....

.....and if I were of the technical analysis ilk, I would have drawn in all sorts of lines and arrows and channels and support points that have all been broken recently. I'm sure you can paint them in with your mind's eye anyway, so there's no labouring the point here. As it is, I've left the uber-basic 200dma to guide. But now comes a different chart that shows PBR in ratio to the WTI crude per barrel, and I've written a couple of observations straight on to the chart.

• PBR was flavour of the year in 2007. In the investment world's perception it moved from relative obscurity to join the pantheon of big oil names, and we can see that on the chart the second half of 2007 saw PBR giving impressive leverage to WTI, its ratio moving from a low of 0.37 to a high of 0.62.

• Then came a period when although PBR's share price still moved up, it was much more in lockstep with the rise in oil. It should be pointed out here that the high point of the PBR:WTI ratio came in February, while the share price peaked much later in mid-May when the Arjun-factor pushed WTI to $147/bbl.

• Next, the May to July 2008 period was brutal, as the flipside of the 2007 leverage coin showed itself and PBR's ratio to WTI dropped sharply.

• The final phase is the one we are in today, with PBR fairly rangebound compared to WTI. The word I use on the chart is "mature", as nowadays the public image of PBR is one of the big oil boys (be that correct or not).

Regulars to the blog will know that I never bought into the hype surrounding PBR, and there are plenty of previous posts that stand as evidence (when the hype machine was at full speed, this humble corner of cyberpace was even featured in the mighty London FT in this note that says "One blogger offers the response: short Petrobras."). Now that PBR has blown off the hype and found a steadier ratio against WTI, I might take it a bit more seriously in the future. However, the Steve Jobs-like UPOD (under promise over deliver) style that Wall St praises is turned on its head in Brazilian business. It's more like OPUD in their world, and the overexaggerated claims for Tupi, Carioca still need to be bumped down a few notches. Up to just a couple of months ago, the image sold was one of PBR only having to stick a pipe into the seabed and out pours 30 squillion barrels of ready-processed lead free fuel. Sure the oil is there (nobody knows exactly how much, but hey...who's counting?) but opex will be high and capex on this project will be simply enormous; we're talking in the hundreds of billions of dollars to get this thing rolling.

It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

So I'm still neutral on Petrobras stock. I'm reasonably bullish on the company and what it will do for Brazil in the long term future, but because shareholders are not the raison d'etre of PBR there's no reason why you or I should prefer it over CVX, COP, XOM or whatever other bigoil takes your fancy.