Shell-BG Deal Could Validate Petrobras Value, Sort Of

A UBS note to investors Thursday suggests that the deal highlights the underlying value of Petrobras’s offshore oil assets. Here is what the analyst had to say:

We think the Shell-BG offer implies that Petrobras could raise dozens of [billions of dollars] should it decide to sell minority stakes in pre-salt assets.

Adding BG’s portfolio of Brazilian assets to its own, Shell becomes the leading foreign oil company in Brazil. BG has a non-operating stake in five offshore blocks. Shell’s current asset is a 20% non-operating stake in the Libra Basin.

The bad news for BG, Shell and Petrobras is the ongoing bribery and corruption scandal engulfing Petrobras. The allegations have already led to a change at the very top of the company’s management.

The worse news is that the government cannot keep its hands off Petrobras. This is very bad news for investors who are whipsawed by the company’s government-mandated pricing.

And Petrobras’s cash position is anything but secure either. The cost of developing those offshore fields is enormous, and the corruption scandal has made borrowing virtually impossible. Low crude oil prices also tamp down the company’s revenues and profits.

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The UBS analyst also notes that the current Petrobras share price does not reflect the full value of the company’s assets. Talk about an understatement. The U.S. Energy Information Administration (EIA) estimates Brazil’s (hence Petrobras’s) proved reserves at more than 13.2 billion barrels, while the country’s own oil regulator puts the total at nearly 16 billion, as of January 2014.

What UBS seems to be saying is that if Petrobras were able to develop its reserves without government interference and corrupt behavior from its executives, there is really no telling what the stock might be worth. And Shell’s willingness to put up $70 billion to acquire BG and its Brazilian assets should give investors a better idea of what Petrobras stock is worth.

The value of the Brazilian company’s assets is hugely diminished by government interference, though. There is a real question whether Petrobras will pay its annual dividend this year. Ratings agencies Fitch Ratings and S&P, and analysts at J.P. Morgan, have already warned of a possible delay in the dividend payment. We wondered if a delay means skipped or just put off for a while.

For a very long-term investment, which is what Shell made in acquiring BG, the Petrobras assets are a huge positive. For an investor looking for a payoff before the end of the decade, the value of the company’s assets probably will not be reflected in its share price for several years. Low crude prices, enormous development costs, low access to cash, a meddling government and a corruption scandal that is still being unearthed all conspire to suck the air out of the share price.

In the noon hour on Thursday, Petrobras stock traded up more than 7%, at $7.41 in a 52-week range of $4.90 to $20.94.

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