This Giant Oil Company Is Headed for Disaster

By Matt Badiali, editor, Stansberry Resource Report:

Of all the companies hurting from lower oil prices, few are in more danger than Brazilian oil giant Petrobras.

The state-owned oil company owns some of the largest untapped oilfields in the world; so it’s a darling of emerging-market investors. And with shares down around 50% over the past year, many investors now think it’s cheap enough to buy.

But it isn’t. The company’s spending is out of control, its profit margins are shrinking, and its debt is soaring. In short, Petrobras is a study in how not to run an oil company.

As longtime Growth Stock Wire readers know, “partnering up with a government” is generally a terrible idea.Bureaucrats running government agencies are not incentivized to produce profits. They are not incentivized to improve the long-term value of a business. Bureaucrats are incentivized to spend their entire budgets and grow larger. This allows them to acquire more power, and bigger budgets for next year, which allows them to acquire more power and bigger budgets for the year after that.

That’s exactly what we’ve seen with Petrobras over the past few years. In 2008, the company had a series of giant oil discoveries offshore. Industry reports I read at the time described many of Petrobras’ projects as the world’s “deepest,” “longest,” or “first.”

But the oil Petrobras found was difficult to produce. Developing its offshore oilfields has taken billions of dollars and years. And the company being run by bureaucrats hasn’t helped.

Petrobras spent $135 billion in capital expenditures (a broad measure of how much energy companies spend to find oil and gas) from 2011 to June 2014. Meanwhile, its debt has doubled from $70 billion in 2010 to $140 billion in June 2014. Petrobras’ debt was just $21 billion at the end of 2007. That’s a huge increase in a short time. Petrobras now holds the largest amount of debt of any oil producer in the world.

For comparison, giant oil and gas companies BP, Shell, and ExxonMobil have debt of $54 billion, $43 billion, and $22 billion, respectively.

In return for taking on more debt and investing in new equipment and upgrades, Petrobras added just 300 million barrels of oil reserves from 2011 to 2013 (the most recent data available). And it has increased its oil production by just 400,000 barrels of oil per day. That means the company spent $450 per new barrel of reserve or $337,000 per barrel of daily production.

Those are ludicrous numbers.

For example, oil producer Whiting Petroleum just paid $6 billion to acquire oil producer Kodiak Oil & Gas. Based on Kodiak’s most recent oil reserves (at the end of 2013), Whiting paid just $36 per barrel of reserve.

Petrobras’ revenues haven’t increased much over the past few years. And because of the insane cost to slightly increase its reserves and production, its profit margins have declined and EBITDA (earnings before interest, taxes, depreciation, and amortization) is down.

2010
2011
2012
2013
2014
Revenue
$128B
$131B
$137B
$129B
$130B*
EBITDA
$46B
$41B
$34B
$28B
$27B*
Profit Margin
36%
31%
25%
23%
22%**
* Consensus estimates
** For the year ended 6/30/14
Source: S&P Capital IQ and Bloomberg

In summary, Petrobras is a highly indebted oil company that spends way too much on growth. That’s a stick of dynamite waiting for a match… which we’re now seeing with crashing oil prices.

From 2010 to mid-2014, the average price of oil was $92.75 per barrel. Most oil companies can earn profits at that price… even Petrobras. The price of crude oil recently fell to a six-year low. With oil now at $50 per barrel, most oil companies are struggling to remain profitable.

But Petrobras isn’t your average oil company. With its high debt and expensive growth, it will soon become more difficult to pay its bills if oil prices remain low. It may even need a government bailout. And that means shares can fall even more.

Even if oil prices increase, Petrobras may still continue to suffer. Remember, it’s a state-owned company. And most every government agency or program isn’t run for a profit. It’s not incentivized to keep costs down. It’s incentivized to grow bloated and inefficient. That’s why shares of Petrobras are down almost 80% over the past six years.

And the trend lower will continue. Anyone bargain hunting in the oil sector right now needs to remember how government works and stay far away from Petrobras. By Matt Badiali, editor, Stansberry Resource Report, The Growth Stock Wire.

And in the American Oil Patch, all heck is now breaking loose. Read…   Oil-Bust Bloodletting: Projects Cancelled, Layoffs Ripple to Other Areas, Default Hits Private-Equity and Pension Funds

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  5 comments for “This Giant Oil Company Is Headed for Disaster

  1. PML
    Jan 9, 2015 at 1:38 am

    Not much new here.

    Big Oil’s costs have been increasing by roughly 10% per year because the low hanging fruit has been picked (i.e. the easy oil is already found and everything that remains is very costly to find and extract)

    Check out this 50 billion dollar disaster in central asia – the post child for what Big Oil is facing

    http://www.wsj.com/articles/SB10001424052702303730804579437492040999738

    Then we have this (note oil was over 100 when this was published so things are FAR worse now)

    OIL BECOMING TOO EXPENSIVE TO EXTRACT: It emerged this week that the drilling of wells in the North Sea has crashed by around 50% this year, compared to the year-ago period. The reason for this is simple: the cost of extracting oil in North Sea has quintupled over the last decade, discouraging companies from investing within the region. http://www.fool.co.uk/investing/2014/07/18/surging-north-sea-project-costs-are-putting-the-regions-future-at-risk-tullow-oil-plc-premier-oil-plc-xcite-energy-limited/

    Oil and gas company debt soars to danger levels to cover shortfall in cash
    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

    In summary, the economy cannot grow when oil prices are high.

    And when prices are low, oil companies cannot make money on the oil that remains to be found so they are slashing capex.

    This will not end well. As in this will collapse civilization.

    Because oil is the life-blood of the global economy — specifically cheaply extractable oil.

    And we stopped finding that sort of oil quite a while ago.

  2. matt
    Jan 9, 2015 at 7:27 am

    Funny you should post this Wolf. let your fingers walk on over to Zero Hedge and take a look at the article Tyler just posted about this Company from Bloomberg. Holy crappoly! It is way way worse than you could ever dream of in any nightmare!

  3. Vespa P200E
    Jan 9, 2015 at 11:07 am

    I think Barrons featured Petrobras as undervalued buy 2 or 3 yrs ago soon after they claimed they found a new oil field.

  4. Petunia
    Jan 9, 2015 at 2:08 pm

    Brazil spent more than it should of to sponsor the World Cup in 2014. They are still on the hook for the next Olympics in 2016. I expect them to dump a lot of oil on the market to pay for that and I hope it works. Because I still remember all the demonstrations and riots over the World Cup expenditures.

  5. Al Tinfoil
    Jan 9, 2015 at 4:40 pm

    As a state oil company, Petrobas is subject to plundering by politicians for campaign expenses and personal enrichment. A scandal erupted lately in which it was alleged that Dilma Roussef and her political party received large amounts from Petrobas as campaign contributions for the latest presidential election. There is also the concern that executives might feather their own nests from Petrobas money.

    The state oil company of Venezuela, PDVSA, had a long history of mismanagement and “leakage” of money into the pockets of executives and the elite in Venezuela before Chavez took power. The story goes that in spite of vast profits, PDVSA had not returned a dividend to Venezuela for 6 years before Chavez took over. Much of the political turmoil in Venezuela centered around Chavez’s attempts to devote the wealth of the oil production in Venezuela to government purposes.

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