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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


May 21st 2010 Petrobras
NYSE Symbol: PBR
Industry: Brazilian Oil Company
Price as of 5/20: $34.30

The earnings keep coming in better than expected. Great earnings this week form the likes of Walmart, Target, Lowes, Home Depot, Valspar, Hewlett Packard, Saks, and Dicks Sporting Goods. These earnings bode well for the economy and consumer spending, but when you're in a correction everyone focuses on the bad news like Greece, Europe, and the oil spill in the Gulf. Oil stocks around the world have taken a hit on concerns of new regulations to curb oil drilling off the coast. This week we'll feature the one of the largest oil companies in the world. The stock of the week is Petrobras, Brazil's most profitable company. Petrobras has produced some of the largest oil discoveries in the world with most of it off their coast. The problem is the oil is down over a mile down below the water's surface and recovering it will not be easy. With the oil spill in the Gulf, investors are concerned the Brazilian government will curtail their own oil exploration or raise the cost of production with new safety requirements. Add to that a need for Petrobras to raise more capital, possibly diluting their shareholders, and concerns with Europe, translates into a 28% correction in the last month. Petrobras is not a conservative investment, but a good long term play on oil with foreign exposure in one of the fastest growing countries in the world. Billionaire investor George Soros agrees. He increased his stake in the oil giant by 18% in the first quarter.
Petrobras does not report earnings with analyst conference calls like U.S. companies. Over the weekend, Petrobras quietly reported earnings of $4.3 billion in the first quarter of the year, up nearly 23% from the same quarter of 2009. Its revenues climbed 18%, based on higher oil prices and increased volumes. According to CFO Almir Barbassa, new and ramped up projects are likely to increase 2010 production by another 480,000 barrels per day, or about 22% higher than in 2009. Approximately 80,000 of the total will come from the company's efforts in the United States. While there are concerns about future restrictions because of the ongoing Gulf of Mexico oil spill involving BP and others, Petrobras will push ahead with its expansion plans. Petrobras continues to search for more oil
with recent major deepwater finds which likely contains about 4.5 billion barrels of light crude. That's less than the 5-8 billion barrel Tupi field, which the company discovered in 2007. It may also be smaller than Libra, another big discovery announced on Friday by the ANP. In June Petrobras will vote to raise more capital from the government in exchange for issuing more shares which will dilute the earnings per share.
Currently, Petrobras is expected to earn $3.88 a share this year and $4.35 a share next year translating into a PE of 8 for this year and a PE of 7 for next year. The PE will rise if the stock is diluted, but the stock seems to be pricing in a lot of bad news with its' stock trading at or near its 52 week low.