Petrobras: Buy and Sit Tight Like Soros

by: David Enke August 19, 2008 | about stocks: NBR / NE / PBR / RIG / XOM    

David Enke

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As reported at Bloomberg.com, George Soros purchased an $811 million stake in Petroleo Brasileiro SA (PBR), (better known as Petrobras) in Q2. The Brazilian oil company is now the largest holding in his fund, amounting to 22 percent of the total $3.68 billion of stocks and American depositary receipts held by Soros Fund Management LLC. Of course, crude oil has taken a dive in the last month, helping to push Petrobras down 28 percent since his purchase and costing Soros $235 million. I guess we would all like to be in a position to lose nearly a quarter billion dollars and still be "OK". Then again, if Soros holds tight, he could end up doing well.

While the timing for Soros may not be perfect for this trade, a number of other people are also betting on Petrobras. As quoted by Ricardo Kobayashi from UBS Pactual SA: "Petrobras has something that other oil companies don't have: oil - lots of it and they're going to find more. If you can buy now and hang on, if you have the staying power, it's great.''

As written in a previous post , estimates have the Tupi-area fields in Brazil costing between $200-$240 billion to develop, in part due to deepwater rigs causing $600,000 a day to rent, forcing Petrobras to look for capital. Yet the cost might eventually be worth it given that the offshore fields are expected to hold up to 50 billion barrels. Petrobras has already leased approximately 80% of the deepest-drilling offshore rigs (see post). The company is also buying new rigs and production platforms.

If oil prices stabilize, companies to consider would be Transocean (RIG), Nobel (NE), and Nabors (NBR), each of which have sold off with lower crude prices, but each of which are also near some key support levels. For longer-term investment, some capital-intensive E&P oil companies such as Exxon Mobil (XOM) should do well, even without direct investment. Of course, this all requires crude oil to stabilize, probably stay over $100 a barrel, and potentially continue its march higher. If not, you may be experiencing the short-term returns of Soros, and not necessarily the longer-term ones.

Disclosure: None

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This article has 22 comments:

  •  
    Aug 19 09:47 AM
    Are you aware that the Brazilian government is proposing a new, entirely state-owned company to mange the exploration of these new discoveries? Details are still unclear, but they are potentially pulling the rug out from Petrobras. The reasons are explicitly nationalistic: President Lula has said that the problem with Petrobras is that so much of its profits go to American investors, while "the oil is ours."

    Just a potential problem, so far, and the government says that all previous contracts (including with Petrobras) will be respected, but... Petrobras is not Exxon. There are risks to doing the vast majority of your business in a single country with a history of nationalism in relation to petroleum.
    Reply | Link to Comment
  •  
    Aug 19 10:12 AM
    Corrections: 1-Lula has never said that profits go to American investors while "the oil is ours". 2-The "new" "state-owned"... "company" is being pushed down Brazilian throats BY LOBBIES. Not by managerial needs. 3-Therefore the "explicit nationalistic reasons" are still badly explained. 4-Brazil has no history of "nationalism"... much less in relation to petroleum. 4-The only times Brazil ever had "nationalistic&qu... tendencies always happened to be around and immediately following the coups d'etat that the United States promoted and financed. Is that clear?
    Reply | Link to Comment
  •  
    Aug 19 01:17 PM
    When one takes about a company, especially international ones good homework needs to be done first, Petrobras is a well managed company and un until now Lula has not shown any signs of changingn the market mentality of Brazil. Verify your facts!
    Reply | Link to Comment
  •  
    Aug 19 01:20 PM
    On top of that, Petrobras nowadays commands one of the highest capitalizations in the world as far as ADRs are concerned
    Reply | Link to Comment
  •  
    Aug 19 02:55 PM
    The first commenter mentioned the biggest problem PBR faces right now- so I won't bother repeating it- but it is a major concern.

    Listen closely- if you are following Soros- his timing is way off this year. He bought an even bigger block of Vale (RIO) as its stock was cresting this year- only to sell it off at a huge loss (see market folly's article). He is like a lot of the old (really old) money men (see TBoone 'short oil' Q-1) who made their money but have lost the touch and seem to be a quarter behind the trend nowadays.

    I also agree with Frankfort/Hessen.

    Listen- I have spent a lot of time in South America- and have positions in Bovespa and Adrs- and there are opps short term but for me they are swing trades (5 point pops almost every week).

    I do, however, feel that many of the best Brazilian plays (and SAM in general) should be tracked closely if you are a long term player- the bleeding is not over- but you should be ready to pull the trigger when it is. There are 2010 leaps on some of the adrs as well- locked in price/less capital intensive.

    See my blog at:

    www.southamericanstock...

    Feel free to join up
    Reply | Link to Comment
  •  
    Aug 19 02:59 PM
    Oh- of the plays that the author mentioned- RIG is the better than NE or NBR. The conference call was funny! The CEO is trying to deal with the 'problem' of how to get money back to shareholders- as they seem to be accumulating too much of it.......(what a high class problem that is)
    Reply | Link to Comment
  •  
    Aug 19 03:00 PM
    Isn't democracy wonderful?

    We can all have our say on what we think,
    or on what we think we know.
    Thanks again for a wonderful article.
    Reply | Link to Comment
  •  
    Aug 19 05:10 PM
    I am bullish on Brazilian oil, but think that the much better way to play it is through shares of Keppel Corp., which trades in Singapore (with a US sponsored ADR trading on the pinks). Keppel is the largest builder of offshore rigs, and the principal supplier to PBR and the Brazilian offshore explorers/servicers, with a $13.5 Billion backlog to fill. They also own, through sub Keppel-Fels, the largest shipyard in Brazil (located near Angra) building offshore rigs (and which fulfills the Brazilian government's locally sourced procurement policies). Keppel is downright cheap compared to the drillers and servicers active in Brazil, but its business will benefit as much or more than these companies if Brazilian offshore oil finds continue to grow.
    Reply | Link to Comment
  •  
    Aug 19 05:20 PM
    keneth heebner also bought a ton of PBR stock. there is some talk that nothing will be taken away ...as in nationalized... of the company's current drilling rights. The future lease auctions is what is uncertain. PBR is already drilling in some of the pre-salt areas.
    Reply | Link to Comment
  •  
    Aug 19 06:15 PM
    Heebner has 2m shares and Fidelity has 125m. They usually know thier stuff.
    Reply | Link to Comment
  •  
    Aug 19 08:47 PM
    Check Heebner's CGMFX over the last month.... :(
    Reply | Link to Comment
  •  
    Aug 19 08:59 PM
    Heebner is a great fund manager....I agree with most of his decisions on the companies he invests in.......don't take short term volitility to heart.

    If you whip out the 10 best stocks over the last 10 years....I am willing to bet almost all of them have had corrections of over 30-40% on their way to returning thousands if not tens of thousands of percents. of returning 30-200 baggers over the 10 year period.

    Reply | Link to Comment
  •  
    Aug 19 10:59 PM
    So far, all they have is abandoned holes and lost drill strings. No cash to build a 300-km pipeline or floating FSPO to LNG liquifaction. "Unitisation"... up for grabs. You are well advised to wait until you see production.
    Reply | Link to Comment
  •  
    Aug 19 11:12 PM
    "first commenter mentioned the biggest problem PBR faces right now- so I won't bother repeating it": DO bother! Which of the four corrections don't you understand?! Want to see two more? How about "Details are still unclear, but they are potentially pulling the rug out from Petrobras"? And what about "government says that all previous contracts (including with Petrobras) will be respected, but..."?
    Reply | Link to Comment
  •  
    Aug 20 02:19 AM
    ... and Soros is short oil at the same time, so in effect he is long the management and short the input resources.
    Don't draw conclusions based only on one leg of complex strategies.
    Reply | Link to Comment
  •  
    Aug 20 02:22 AM
    Frankfurt/Hessen,
    Get a life, learn how hedge funds make money and then comment.
    You don't expect anyone to listen to a world-unknown like you, do you?
    Reply | Link to Comment
  •  
    Aug 20 09:03 AM
    To IAM Moraes... From your name (and your passion on the subject) I assume that you are Brazilian and can read Portuguese, so here are a few links for you:

    A link from the Ministry of Planning of the Federal Government of Brazil, in which Lula (on August 15) complains that half of Petrobras belongs to Americans: clippingmp.planejament...

    A link from Brazil's leading newspaper, Estado de Sao Paulo, in which on August 12 Lula says "the oil is ours": www.estadao.com.br/eco...

    The exact quote here is "O petróleo não é do presidente da República ou da Petrobras, ele é do povo brasileiro"

    You're right that Lula has shown himself to be a market-friendly, sensible leader, and probably that will continue into the next administration. But there are risks here that the original post did not mention, is all. Risks aren't surefire disasters... they're risks.
    Reply | Link to Comment
  •  
    Aug 20 10:36 AM
    "link from (...) Lula (on August 15) complains that half of Petrobras belongs to Americans": yet, that was not a complaint but a statement of fact, only 50% belongs to Brazil, and it had another reason than you think: the government of Brazil has had a 40-year history of frontally attacking the non-international industry. Strictly-native Brazilian industry has gone through hell and beyond with Brazilian government, it was and always is under open attack, see labour laws or the 4 or 5 dozen taxes that Brazilian businesses pay. The one thing that saved Petrobras from the government has been its foreign ownership --it's permanently safe... unless you can convince me that the "american owners" are being sabotaged from Europe... who else? Lula is surrounded by lobbyists, therefore spies, who are telling him to set up a "new company" so that the pattern of native attack -interrupted by his government- can resume later on. That is the problem with the "new company", NOT americans, not the possibility of rug-pulling. It's the pattern that was interrupted 5 years ago. It's always about destroying native industry and its value. International investors are safe. They always were. There are more Brazil-made millionaires among them than in Brazil.
    Reply | Link to Comment
  •  
    Aug 20 12:26 PM
    Much of what is written here sounds like paranoia to me, or , perhaps worse, irrational conclusions based on inadequate information. Best to wait . . .
    Reply | Link to Comment
  •  
    Aug 21 05:11 AM
    Soros lost his touch.

    But Jim Rogers says commosities will continue to go higher. Visit a Jim Rogers`s blog at jimrogers-investments....
    Reply | Link to Comment
  •  
    Aug 21 05:13 PM
    PBR is a semi public co., 53% brasilian gov. and 47% ADR's
    "O petróleo não é do presidente da República ou da Petrobras, ele é do povo brasileiro" (political spin)
    The senior partner calls the shots...this"soap opera" will have a long run.,stay tuned!

    Reply | Link to Comment
  •  
    Aug 30 03:46 AM
    The option traders will underhandedly short change everyone who don't invest likewise
    Reply | Link to Comment
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