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Cheapest Petrobras Since ‘99 Real Devaluation Lures Aberdeen

Cheapest Petrobras 1999 Real Devaluation Lures Aberdeen
Petroleo Brasileiro SA's P-51 oil platform stands in the Marlim Sul field, at the Campos Basin, about 150 kilometers off the coast of the state of Rio de Janeiro. Photographer: Rich Press/Bloomberg

Petroleo Brasileiro SA’s tumble to the cheapest valuation since 1999 may be a signal to buy.

The Brazilian state-controlled oil producer’s ratio of price to net assets fell to 0.9 from 1.8 two years ago as the global economic slowdown deepened a sell-off spurred by concern President Dilma Rousseff’s government is putting national development goals ahead of shareholders’ interests. The ratio, which touched a 12-year low of 0.6 on Sept. 23, is the second lowest among 20 oil companies with a market value of at least $50 billion, surpassing only Russia’s Gazprom OAO, according to data compiled by Bloomberg.

Aberdeen Asset Management, Henderson Global Investors Ltd. and Deutsche Bank AG say Petrobras’s two-year, 41 percent sell-off is excessive. The plunge is almost double the 21 percent slump in BP Plc, whose Gulf of Mexico well caused the worst oil spill in history, as investors dumped Petrobras after production gains slowed and the company diluted shareholdings with a record $70 billion stock sale aimed at helping fund the oil industry’s largest investment plan.

“There are plenty of issues out there, but taking a long-term view it’s actually very cheap, especially when you compare it to other majors around the world,” said Nick Robinson, who manages $6 billion in Brazilian stocks at Aberdeen in Sao Paulo and said he bought Petrobras shares as recently as last month.

Aberdeen, which oversees about $300 billion globally, was the largest buyer of Petrobras American depositary receipts in the third quarter, boosting its holding by 13.1 million preferred ADRs to 85.6 million, or 3.1 percent of the total, according to data compiled by Bloomberg. Each ADR corresponds to two shares. The firm also bought 403,000 local preferred shares in the quarter, bringing the total to 4.8 million, the data show. Robinson declined to give further details.

Investment Plan

Petrobras, the world’s fifth-largest oil company by market value, aims to more than double production to 6.4 million barrels a day in 2020, in part by spending $224.7 billion over five years for investments including development of deep-water projects at the Lula field, the largest discovery in Brazil’s history.

The company sold $70 billion in stock in September 2010 to help finance that plan and gain control of 5 billion barrels of government-owned reserves. The share sale boosted the government’s stake to 48 percent from 40 percent while diluting minority investors.

Petrobras is down 19 percent this year through yesterday, losing only to the 20 percent slide in India’s Reliance Industries Ltd. among its major oil and gas rivals. Brazil’s benchmark Bovespa index slumped 16 percent in that period, while crude is up 12 percent in New York.

Petrobras slipped 2.7 percent to 21.52 reais in Sao Paulo trading today, matching the decline in the Bovespa.

Local Purchases

Brazil requires Petrobras to buy as much as 70 percent of its equipment from local providers as part of an effort to strengthen its economic expansion and create jobs. As rising gasoline demand outpaces local refining capacity, the company also has increased spending on refineries.

Those efforts may be hurting production, said Ted Harper, who helps oversee $7.8 billion for Frost Financial Management in Houston.

“Those factors -- which are clearly, from a political standpoint, favorable for Brazil -- increase the cost associated with bringing reserves online and extend the time to development,” said Harper, whose firm sold the last of its Petrobras holding in April.

As recently as June 30, Petrobras was the seventh-biggest company in the world by market value. It was the 20th-largest as of yesterday, according to data compiled by Bloomberg, with a market capitalization of $171 billion.

‘A Big Discount’

Dividing the company’s market capitalization by its proven oil reserves, production rights and recoverable oil would equal to a price of about $5 per barrel, Petrobras Chief Executive Officer Jose Sergio Gabrielli said in an interview at Bloomberg’s headquarters in New York. Add to that assets such as 7,300 megawatts of power generation capacity and 1,900 million barrels of refinery capacity and you get “a bargain,” he said.

“We have today in the equity value of the company a big discount,” Gabrielli said.

The company, based in Rio de Janeiro, will benefit from stronger domestic demand for fuel because of Brazil’s economic growth, said Chris Palmer, who helps manage $2.5 billion in Latin American assets as Henderson’s London-based director of global emerging markets.

Domestic Prices

Henderson, which oversees about $121.5 billion worldwide, bought a net 3.7 million Petrobras common and preferred ADRs in the third quarter, for a total of 18.7 million held, according to data compiled by Bloomberg. The firm also added 1.3 million common shares in Brazil, bringing the total to 6 million, the data show. Palmer declined to comment on the data or whether Henderson has made additional purchases since then.

The government slashed taxes on fuels in October to allow Petrobras to raise gasoline prices 10 percent and diesel prices 2 percent without increasing costs at the pump. It was the first increase in more than three years. The move came after third-quarter profit fell 26 percent from a year earlier as rising domestic demand led it to boost imports of the fuels and a weaker local currency swelled debt costs, according to a Nov. 11 statement from the company. The result still beat analysts’ estimates, marking the seventh time in the past eight quarters earnings exceeded forecasts.

Global Peers

Petrobras trades at 6.3 times reported earnings, below its five-year average of 10.3 and near the lowest since March 2009. It’s the fourth-lowest ratio among the company’s global peers, whose average is 9.7, also below their five-year mean of 12.6, amid concern Europe’s debt crisis will push the global economy into recession.

The world’s 20 largest oil companies are trading at 1.8 times net assets, or book value, below the five-year mean of 2.4. Petrobras, which trails Exxon Mobil Corp., PetroChina Co., Royal Dutch Shell Plc and Chevron Corp. in market value, trades at less than half its five-year average price-to-book of 1.9.

The last time Petrobras was this cheap by that measure, Brazil’s economy was mired in recession and reeling from a currency devaluation. The company’s price-to-book ratio fell to a record-low of 0.4 in January 1999, when the country abandoned its currency peg after Russia’s debt default drove investors out of emerging-market assets. The real sank 41 percent that month.

“You have to follow the fundamentals,” said Palmer of Henderson. “Investors in Brazil are getting a bit overawed by what’s happening in Europe.”

Economic Growth

Rousseff’s government forecasts growth of as much as 4 percent this year in Latin America’s largest economy, down from a 7.5 percent expansion last year, the fastest pace in more than two decades.

Rousseff was chairwoman of Petrobras from January 2003 until March 2010, when she resigned from her public posts to pursue the presidency. She was replaced by Finance Minister Guido Mantega, who remains her top economic adviser.

Amid platform shutdowns and delays in drilling-rig deliveries that have constrained development of the Carioca and Lula fields in deep waters of the Santos Basin, Chief Executive Officer Jose Sergio Gabrielli said in an Oct. 6 interview that domestic output will finish the year in the “lower range” of its goal of 2.1 million barrels a day. Output rose 1.2 percent in the first nine months of this year, the slowest rate since 2007, according to the company.

Oil Reserves

Petrobras plans to double its 12.7 billion barrels of proven oil reserves in a decade after expanding its deposits for 18 consecutive years. Competitors are struggling to find oil in more difficult locations in the Arctic and countries that pose bigger legal and contractual risks in West Africa, Gianna Bern, president of Chicago-based risk-management adviser Brookshire Advisory and Research, said last month.

Foreign investors have added 38.9 million reais to Brazil’s equity market this year through October, according to the Sao Paulo exchange. That’s down from 4.7 billion reais in the same period last year and the smallest figure since 2008, as concern that Europe’s mounting debt crisis and quickening domestic inflation will hurt growth kept investors away. Should the global outlook improve, “bellwethers” like Petrobras will be the first to receive flows, said Frederick Searby, chief Latin America strategist at Deutsche Bank in New York.

“It’s very contrarian,” Searby said. “You’re going to have to be a little ahead of the curve.”

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