What A Sell Rating Really Means To Petrobras (PBR, BP, XOM)

Petroleo Brasileiro (NYSE: PBR), or Petrobras, is getting hit harder than most of the giant intregrated oil giants today.  A “Sell” rating came its way today after UBS downgraded the stock from an already cautious “Neutral” rating.  This is on the heels of an unenthusiastic “Market Perform” rating from Howard Weil just a day before.

UBS is concerned about uncertainties for shares capitalization that is still pending.  The larger fear here is that the company may be overpaying for the endless oil reserves.  It  may raise $25 billion and would effectively be buying the rights to tap into what is believed to be about 5 billion barrels of oil.

Another problem is that this oil is not cheap to get to.  Most of the reserves are located in deepwater drilling fields.  You can thank BP plc (NYSE: BP) with its Deepwater Horizon disaster in the Gulf of Mexico for part of this.  The environmental restrictions, and the cost of doing business in deepwater drilling, just went up as a result.

UBS believes that valuation problems could cause more delays and the firm is worried about the Brazilian government demanding more than $6.00 per barrel in the transaction.  Some reports out of Brazil are indicating an implied price of even $7.00 to $8.00 per barrel.  It is not quite as simple as “You buy at $7 or $8 and sell it at $78…”  There are costs all along the way, and those costs are now likely to rise going forward.

We already saw one delay this summer out to September.  UBS fears that the giant share sale to minority investors will be interrupted or delayed again.  We also saw that the original share sale was lowered down from original expectations.  The reports first out were for a vast $50 billion sale, but the latest share sale was indicated at roughly $25 billion.

Petrobras shares are down 4.3% at $35.97 versus a 52-week trading range of $31.21 to $53.46.  Fortunately, trading volume is anemic at ‘only’ 10 million shares with the last of trading to go.  With more than a $2.00 drop down to under $78 per barrel today and with concerns of a slowing economy back to front and center, Petrobras shareholders should be thankful that the one-day drop is not worse.

BP shares are down 3.5% at $38.69.  Exxon Mobil Corporation (NYSE: XOM) is only off by 1.6% at $60.50 on the day.

Telling a shareholder that they should feel good about a 4.3% loss is hard to do.  Still, things could have been worse here considering the uncertainty that the company now faces ahead.

The Petrobas ADRs were trading around $37.00 when the delay of the offering started to make the rounds.  That is also roughly the same price as when the deal was first disclosed as being around $50 billion.

Considering the massive dilution that will be seen here and that the government and employee stake is so large, maybe Petrobras should tell the government it will bid on the oil at a future undisclosed date.

If you see another day or two of this selling pressure, the Petrobras analyst downgrade will have created an opportunity for longer-term investors.

JON C. OGG