Can Petrobras live up to its potential?
Too much debt, not enough profit turn the Brazil oil giant from stock pick to sell.
Whatever its potential, Petrobras (PBR) is just not a very profitable oil company right now. For the trailing 12 months the company’s return on assets is an abysmal 1.84%. Its return on invested capital is just 1.95%. That compares to a return on assets of 13.12% at ExxonMobil (XOM) and a return on invested capital of 27.73%.
And that’s a big problem -- so big that I dropped from my Jubak Picks 50 portfolio on May 3 -- because the Brazilian oil company has a hugely expensive capital-spending program scheduled.
The company is looking to raise $20 billion from bond sales and bank loans this year, as part of its efforts to fund a $237 billion capital-spending plan for 2013-2017, as it works to develop the series of very large discoveries it has made since 2007 in the extreme deep water, pre-salt geologies of the South Atlantic. The first find, the Tupi block, alone might hold 5 billion to 8 billion barrels of reserves. In total the company’s deep water finds could lead to a tripling of Brazil’s total reserves.
It looks like Petrobras will be able to raise the money. A recent bond offering raised $11 billion, the largest amount for an emerging market debt deal ever. The company sold three-, five-, ten- and thirty-year fixed-rate debt and three- and five-year floating rate notes. Standard & Poor’s rates Petrobras BBB, the second lowest investment grade. That’s on a par with Brazil’s own rating from S&P. Petrobras paid 2.6 percentage points over Treasuries on its 10-year debt.
As big as the offer was, it’s certainly not the last one we’ll see from Petrobras. And that gives me pause. Petrobras already carries $74 billion in net debt. That’s about 10 times the debt load at ExxonMobil.
Let’s see... 10 times ExxonMobil’s debt load and a return on invested capital less than 1/10th of ExxonMobil’s. These aren’t numbers that make me think I want to wait around for Petrobras to show whether it can live up to its potential.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares in Petrobras as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio. For more of Jim’s posts and picks check out his free site at JubakPicks.com or his subscription site at Jubakam.com.
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