Eike Batista has sweeter barrels than Petrobras

September 10, 2010

Eike Batista may soon be adding billions to his bank balance. Shares of energy group OGX — the flagship vehicle of Batista, Brazil’s richest man — value its 7 billion-odd shallow water oil reserves at roughly $5 a barrel. That looks a bargain against the $8.51 the government is extracting from Petrobras for deepwater crude. It’s no wonder China’s Sinopec Group and CNOOC are considering buying into assets owned by the company.

A $100 punt on OGX last September would now be worth $180, compared with a meager $80 in national champion Petrobras and $113 in Brazil’s Bovespa stock index. Yet OGX could still be good value for money — especially in the light of Petrobras’ recent deal with the government for new reserves.

Here’s how a back-of-the-envelope assessment looks. OGX has a market capitalization of around $38 billion and doesn’t yet generate any revenue. Simplistically, that means investors are placing a value of roughly $5 a barrel on OGX’s estimated stash of around 7 billion barrels. These are yet to be turned into flowing crude, but they are largely in shallow water, making them easier and cheaper to develop than deepwater reserves.

Petrobras, meanwhile, is issuing $43 billion of stock to the Brazilian government in return for 5 billion barrels of untapped deepwater reserves — equating to some 70 percent more per barrel than OGX’s reserves are worth. The state-controlled behemoth is likely to get preferential tax treatment, but it will also face greater technical challenges and expense extracting the crude. The government’s influence may also result in the company making other investments with more social than financial returns.

OGX shares have recently fallen back, with some investors selling to free up cash to buy new Petrobras stock in a giant issue set to accompany the deal with the government. It’s hard to compare the two companies’ valuations directly. But if Petrobras’ latest deal with the government is a guide, China’s energy giants may have a better plan. OGX may be essentially a start-up. But it could prove a cheaper bet than Petrobras on Brazil’s hot oil sector — minus the government meddling.

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I have driven through Brazil and seen first hand how busy Petrobras gas stations are. Every pump at a Petrobras station can be filled yet, the unbranded station across the street has no cars at the pump. When I returned to the US, I immediately purchase Petrobras stock. Greg Urroz, CRS Phoenix, AZ Realtor

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