Lagging Petrobras won’t win back investors easily

July 25, 2011

By Christopher Swann
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For all its promise, Brazil’s oil bounty has so far disappointed investors. State-controlled giant Petrobras has massively trailed rivals since the Brazilian government forced it to pay up for offshore oil reserves nearly a year ago. Now the group is trying to make amends – trimming unpopular refining spending and lifting output goals. But the company’s pledges deserve skepticism.

It has been a grim 10 months since Petrobras raised $70 billion in the biggest-ever share offering. Its 15 percent stock-price decline has been particularly abysmal considering the 50 percent surge in the price of oil. This has propelled peers like Exxon Mobil to chalk up gains of around 40 percent.

Petrobras deserved to be punished. In last year’s offering the government grossly overcharged for new oil wells, transferring billions of dollars of value away from shareholders. It also promised $74 billion of capital investment in refining over five years – which seemed aimed at creating jobs rather than generating returns.

The latest five-year plan at least suggests that Petrobras is not entirely tone deaf. Extracting Brazil’s vast deep-sea trove – the task that really excites investors – is to get a higher share of the $225 billion capital spending budget, up from 53 percent to 57 percent. Refining will get $3 billion less over five years, down to 31 percent from 33 percent.

Petrobras also appears to be disavowing any plans to issue new stock – no small mercy after swelling the share count by about half. And in an uncharacteristic nod toward fiscal responsibility, the firm is also talking about $13.5 billion in asset sales.

Still, these look like baby steps against the group’s lagging valuation. Petrobras is now trading at just 55 percent of its net asset value, as estimated by energy consultancy IHS, down from about 80 percent before its offering and far below the 70 percent that peers like Exxon and Chevron fetch.

Petrobras’s credibility is not helped further by stretching its 2020 production goals to 6.4 million barrels of oil a day – up from 5.4 million barrels, a target that many analysts already considered overambitious. Investors have been burned before by Petrobras. Until the company actually delivers on some of its promises, a discount is deserved.

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