R-Squared Energy Blog

Pure Energy

Loading Up on PBR

A little over a month ago, as a result of the dramatic fall in the market capitalizations of oil companies, I opened up a brokerage account with Ameritrade to take advantage of the fire sale. Besides my ConocoPhillips (COP) stock, most of my investments are diversified in various mutual funds – often diversified into things I don’t know too much about. As I have said many times before, I am a long-term investor. Short-term volatility doesn’t impact me much; my time horizon when I buy a stock is 5-10 years out. Therefore, I see an opportunity.

Do I think oil prices will be hanging around $40 in 10 years? Absolutely not. I think the OPEC cuts will begin to bite, and they are going to be very slow to increase production again. I also think that non-OPEC production will peak soon, if it hasn’t already (and that is in fact a widely held view; the bigger question is whether worldwide production will peak – and I think it will). Right now the December 2009 WTI contract is trading above $52, so the market is expecting prices to go up from here.

So, if I am correct, and I think oil prices are headed back above $100 in the next few years, what is a long-term investor to do? If you can put up with the risk, you could buy oil futures. But I don’t like that kind of risk. Better I think is investing in energy companies, and oil field services companies. But which ones? If I didn’t already own COP, it would have been a no-brainer. The price to earnings ratio (PE) had fallen to below 4 – the lowest of any major oil company – and the dividend yield was right at 4%. It was being priced like a company in dire financial straights, when it was nothing of the sort. But I already own COP, and I don’t want to concentrate my holdings too much.

The other problem with the U.S. based oil companies is that their access to oil is drying up. So, how about a non-U.S. oil company sitting on a bunch of reserves? Saudi Aramco seems like a no-brainer, but I don’t believe there is any way to invest there. There are companies like Statoil (STO) in Norway, ENI (E) in Italy, and Petrobras (PBR) in Brazil. The one that really intrigues me is Petrobras. They are sitting on large reserves, and have made a number of new discoveries in recent years. Consumption in Brazil is very low relative to the U.S., and the EIA forecasts that they will become a net exporter in 2009. Production has been growing in recent years. Access is not a problem, since they still have room to grow even at home. I have also noted my opinion that in a post-peak world, Brazil is poised to continue to grow their energy production for many years.

I had missed the chance to buy PBR at $15 in November, and by the last week in November the price had bounced back to >$20. But with PBR trading at $21, I went ahead and put in a limit order at $17.50, hoping I hadn’t missed the bottom. On December 4th, that trade executed. The PE then was hovering around 5. (I had almost invested some on margin, but the margin rates were much too high for my liking).

Since then, the stock has risen by as much as 48%, until backing off somewhat last week. As I write this, my shares are up 34% in less than 3 weeks. Despite my long-term view, such a quick run-up has provided a great temptation to go ahead and sell. But short term capital gains are taxed at a much higher rate than are long term capital gains, so I plan to go ahead and hold for at least a year. In the interim, if shares fall again to $15, I will put more money down.

As a footnote, there was an investment that I carefully considered as an alternative: EWZ, which is a closed-end mutual fund that invests in Brazilian companies. The reason I considered this is that if you look at the low consumption in Brazil, combined with their oil reserves, you can make a very strong case that their economy has a lot of room to grow. But one of EWZ’s major holdings was Petrobras, so I figured I would just go directly with PBR, who stand to benefit quite a lot as Brazil’s economy grows.

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December 23, 2008 - Posted by | ConocoPhillips, COP, EWZ, investing, oil companies, PBR, Petrobras

22 Comments

  1. Did you consider buying the ETF that tracks the price of oil, symbol USO, it currently trades for around $30. Of course it doesn’t pay a dividend but PBR’s dividend is so low it hardly qualifies as a dividend.

    Comment by Anonymous | December 23, 2008

  2. Did you consider buying the ETF that tracks the price of oil, symbol USO, it currently trades for around $30. Of course it doesn’t pay a dividend but PBR’s dividend is so low it hardly qualifies as a dividend.

    Comment by Anonymous | December 23, 2008

  3. In my professional dealings with Petrobras, they are one of the best run oil companies. Good people with good business sense. Politics plays little role in thier decisions. This is very unlike any other company with a name beginning with “P”.

    Couple this with the external issues that you site and you end up with an excellent investment decision.

    Comment by Steve the engineer | December 23, 2008

  4. In my professional dealings with Petrobras, they are one of the best run oil companies. Good people with good business sense. Politics plays little role in thier decisions. This is very unlike any other company with a name beginning with “P”.Couple this with the external issues that you site and you end up with an excellent investment decision.

    Comment by Steve the engineer | December 23, 2008

  5. I was thinking about USO too. It would double if oil doubled in price. I also like TOT. I’m not buying anything until the end of february though. The first quarter is usually the lowest for demand.

    Comment by Maury | December 23, 2008

  6. I was thinking about USO too. It would double if oil doubled in price. I also like TOT. I’m not buying anything until the end of february though. The first quarter is usually the lowest for demand.

    Comment by Maury | December 23, 2008

  7. RR-
    Excellent analysis, I think.
    I think Shell is worth looking at. They were paying a 7 percent divvie last time I checked. You get paid to wait.
    That is my only concern, that you may wait a long time. I think the second shoe has yet to drop on oil prices. I think we see $10 a barrel before this is over.
    So, I think there will be even better buying opps ahead. When oil hits $10 and there is a sense of gathering gloom that the commodities story is over forever, then you want to buy. You may also want to take a flyer then on oil palm companies.
    Already, Cushing spot at $32, and this recession is barely begun. Remember the storyline that China would save everything all the time? Their steel production is down y-o-y, and they have stopped buying cardboard from L.A.
    South Korea oil consumption is down 12.5 percentin Nov., y-o-y.
    Port traffic at L.A.-Long Beach harbors is down double digits y-o-y.
    Friends, I am worried, and I hate to be a fear-monger, one of the lower forms of life.
    Japan’s oil consumpotion already at 1972 levels, is also headed south. Europe is using less every year, not more–and that was before the recession took hold.
    There is also the risk that by the time the world economy recovers, the PHEV or high mpg hybrids will be widely introduced, meaning that oil demand never really recovers.
    It could be 10 years before oil demand recovers, except by then the average mpg in Europe and Japan will be X percent higher than today. My guess is 40 percent. Maybe even the USA will obtain higher fleet mpgs. Miracles do happen, at least Rick Warren says so.
    Sheesh, the L.A. Times auto critic said he got 53 mpg in city driving from the new Ford Fusion. 53 mpg!
    In short, this oil glut could last for many years, maybe even 10, maybe 15, and maybe oil demand never recovers, but rather just declines gardually for decades. That is a long wait — if you are getting a divvie from Shell, maybe not a bad wait, but a long, long wait.

    Comment by benny "MOAG" cole | December 23, 2008

  8. RR-Excellent analysis, I think. I think Shell is worth looking at. They were paying a 7 percent divvie last time I checked. You get paid to wait.That is my only concern, that you may wait a long time. I think the second shoe has yet to drop on oil prices. I think we see $10 a barrel before this is over. So, I think there will be even better buying opps ahead. When oil hits $10 and there is a sense of gathering gloom that the commodities story is over forever, then you want to buy. You may also want to take a flyer then on oil palm companies.Already, Cushing spot at $32, and this recession is barely begun. Remember the storyline that China would save everything all the time? Their steel production is down y-o-y, and they have stopped buying cardboard from L.A. South Korea oil consumption is down 12.5 percentin Nov., y-o-y.Port traffic at L.A.-Long Beach harbors is down double digits y-o-y. Friends, I am worried, and I hate to be a fear-monger, one of the lower forms of life.Japan’s oil consumpotion already at 1972 levels, is also headed south. Europe is using less every year, not more–and that was before the recession took hold.There is also the risk that by the time the world economy recovers, the PHEV or high mpg hybrids will be widely introduced, meaning that oil demand never really recovers. It could be 10 years before oil demand recovers, except by then the average mpg in Europe and Japan will be X percent higher than today. My guess is 40 percent. Maybe even the USA will obtain higher fleet mpgs. Miracles do happen, at least Rick Warren says so. Sheesh, the L.A. Times auto critic said he got 53 mpg in city driving from the new Ford Fusion. 53 mpg!In short, this oil glut could last for many years, maybe even 10, maybe 15, and maybe oil demand never recovers, but rather just declines gardually for decades. That is a long wait — if you are getting a divvie from Shell, maybe not a bad wait, but a long, long wait.

    Comment by benny "MOAG" cole | December 23, 2008

  9. Robert – Got any comments or opinions on Sasol (SSL)?

    The American ADR shares are down 55-60% right now w/ a nice 7% dividend.

    FYI – love the call on PBR and congrats on the fast money.

    Comment by Matt SF | December 24, 2008

  10. Robert – Got any comments or opinions on Sasol (SSL)? The American ADR shares are down 55-60% right now w/ a nice 7% dividend. FYI – love the call on PBR and congrats on the fast money.

    Comment by Matt SF | December 24, 2008

  11. Matt, I don’t know enough about Sasol to know whether or not they have bigger difficulties than just low oil prices. On the face of it, they would seem to be a buy. But I don’t know if they are expected to continue to make money at these oil prices. Most major oil companies will, but I know that those that aren’t integrated and some smaller companies have been struggling. Flying J just declared bankruptcy.

    Cheers, Robert

    Comment by Robert Rapier | December 24, 2008

  12. Matt, I don’t know enough about Sasol to know whether or not they have bigger difficulties than just low oil prices. On the face of it, they would seem to be a buy. But I don’t know if they are expected to continue to make money at these oil prices. Most major oil companies will, but I know that those that aren’t integrated and some smaller companies have been struggling. Flying J just declared bankruptcy.Cheers, Robert

    Comment by Robert Rapier | December 24, 2008

  13. Did you consider buying the ETF that tracks the price of oil, symbol USO, it currently trades for around $30.

    Have thought about it, and continue to consider it as an option. Trading below $29 right now.

    Cheers, Robert

    Comment by Robert Rapier | December 24, 2008

  14. Did you consider buying the ETF that tracks the price of oil, symbol USO, it currently trades for around $30.Have thought about it, and continue to consider it as an option. Trading below $29 right now.Cheers, Robert

    Comment by Robert Rapier | December 24, 2008

  15. Ha — I thought you were talking about Pabst Blue Ribbon. I was curious what new direction you were going to take your blog for 2009 🙂

    Have a Merry Christmas, Robert!

    Comment by steinley | December 24, 2008

  16. Ha — I thought you were talking about Pabst Blue Ribbon. I was curious what new direction you were going to take your blog for 2009 :)Have a Merry Christmas, Robert!

    Comment by steinley | December 24, 2008

  17. PABST BLUE RIBBON(PBR) is a far more shrewd investment than energy related stocks in my humble opinion. Low ethanol content, but enjoyable and possibly sustainable none the less. I’ll stop there before I start hating on wall street, “free money”, and corporate stock exchange in general.

    Comment by evan | December 24, 2008

  18. PABST BLUE RIBBON(PBR) is a far more shrewd investment than energy related stocks in my humble opinion. Low ethanol content, but enjoyable and possibly sustainable none the less. I’ll stop there before I start hating on wall street, “free money”, and corporate stock exchange in general.

    Comment by evan | December 24, 2008

  19. My short term investment advice is this: The recent Acetonitrile shortage which is caused by the stagnent manufacturing sector will cause analytical labs (especially in pharmaceuticals) to purchase new UPLC (next generation of HPLC) instruments and to buy more small ID and small particle size HPLC columns. Look for companies like Agilent and Waters to do relatively well in the next couple of quarters.

    Of course, I might be wrong.

    Comment by Dennis Moore | December 25, 2008

  20. My short term investment advice is this: The recent Acetonitrile shortage which is caused by the stagnent manufacturing sector will cause analytical labs (especially in pharmaceuticals) to purchase new UPLC (next generation of HPLC) instruments and to buy more small ID and small particle size HPLC columns. Look for companies like Agilent and Waters to do relatively well in the next couple of quarters.Of course, I might be wrong.

    Comment by Dennis Moore | December 25, 2008

  21. Dennis, also, don’t forget products like SolventTrack which recycle acetonitrile. The UPLC manufacturers don’t look quite so good if you consider that a lab can get one machine that will solve there acetonitrile shortages.

    Besides, I think we are at the peak of the shortage at the moment. Once the backlog has eased up, China will be out of the market AFAIK and you might see the price drop drastically.

    Comment by steve | January 12, 2009

  22. Dennis, also, don’t forget products like SolventTrack which recycle acetonitrile. The UPLC manufacturers don’t look quite so good if you consider that a lab can get one machine that will solve there acetonitrile shortages. Besides, I think we are at the peak of the shortage at the moment. Once the backlog has eased up, China will be out of the market AFAIK and you might see the price drop drastically.

    Comment by steve | January 12, 2009


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