If there is one lesson I’ve learned over 25 years of investing, it’s that the bigger the mess, the greater the opportunity for outsized returns.
You’d be hard pressed to find a bigger mess than Petrobras (NYSE: PBR), Brazil’s largest and most corrupt oil company.
Though not quite in Exxon Mobil’s (NYSE: XOM) league, Petrobras has considerable girth.
Over the past 12 months, it recorded $153 billion in sales – four times the sales it recorded just 10 years ago.
In this regard, Petrobras is an exceptional growth story.[ad#Google Adsense 336×280-IA]But Petrobras is also an exceptional story of corruption, political patronage and incompetence.
Brazil’s federal government owns 60.5% of Petrobras shares.
Over the years, political potentates have skimmed Petrobras money to quell political opposition.
Few of Brazil’s rulers have been more egregious in their skimming than current President Dilma Rousseff.
Back in October, Rousseff narrowly defeated rival Aécio Neves. Petrobras money likely put her over the top. Prosecutors allege Petrobras contractors were permitted to pad their contracts and remit kickbacks to Petrobras managers, who then passed hundreds of millions of dollars to politicians and, importantly, to Rousseff’s Workers’ Party.
Doling out millions of dollars to politicians isn’t the worst of it. Over the years, Petrobras has piled on long-term debt in billion-dollar chunks. Today, Petrobras is the most indebted oil company in the world, with $129 billion in long-term debt. Exxon Mobil, in comparison, recorded $369 billion in sales over the past 12 months. Its long-term debt, at $30 billion, is a less than a quarter of Petrobras’.
The long slog south has been painful for long-term Petrobras investors. In 2008, Petrobras shares traded above $70. In 2011, they traded above $40. Last month, they traded below $5. Today, they trade above $8.
With oil plunging, investors have been concerned that Petrobras won’t make its dividend payments. That’s one reason shares plunged 35% in just six months.
The only advice I can offer long-term investors is dollar-cost average down, because Petrobras is a buy. Pressure has ramped up to excise corruption and impose competency. Brazilian prosecutors appear willing to make Rousseff’s life considerably more miserable. Impeachment is within the realm of possibilities.
At the same time, new management is shoring up Petrobras’ precarious financial standing. The company has secured $12 billion in additional funding to reduce near-term liquidity concerns. It’s expected to divest $13.7 billion of assets to solidify its cash position. Operations are financed through 2015.
Petrobras shares, down 37% over the past year, have rebounded 57% over the past month. Rising oil prices have certainly helped, but rising appreciation of Petrobras’ considerable asset base shouldn’t be discounted.
Petrobras has 14 billion barrels of oil in proven reserves, which is estimated to double over the next few years, as exploration in deepwater pre-salt fields off Brazil’s coast confirms further discoveries. If Petrobras indeed confirms billions of barrels in new reserves, it will soon challenge Exxon Mobil’s 25.4 billion barrels of proven reserves.
Petrobras is cheap, and rightly so, but its relative value presents an opportunity. Petrobras trades at 0.5 times sales and book value. Exxon Mobil trades at 1 times sales and 2.1 times book value. BP PLC (NYSE: BP), a High Yield Wealth recommendation and one of the cheaper integrated giants, trades at 0.4 times sales and 1.2 times book value.
Income investors might be put off by lack of income. Until this year, Petrobras had been a perennial dividend payer. The dividend remains in limbo for 2015. That said, the opportunity to capture significant share-price appreciation more than compensates for any forgone near-term income.
— Steve Mauzy[ad#wyatt-generic]
Source: Wyatt Investment Research