Petroleo Brasileiro S.A. (ADR) (PBR): Brazil Energy Summit highlights favorable investment climate - Goldman Sachs - June 24, 2008
What's changed
We attended the Brazil Energy Summit hosted by the Brazilian-American Chamber of Commerce in New York on June 23. Panelists included both government officials and company executives who discussed a variety of topics related to the development of the energy industry within Brazil.
Implications
We came away from the summit with a continued favorable view of the energy investment climate in Brazil, which we think ultimately bodes well for Petrobras shares. We continue to be impressed by the healthy debate regarding future energy policy in the country, including discussions of the role of private versus public investment, alternative energy, and appropriate fiscal policies. Unlike in many resource-rich, developing nations, government officials and company executives both appear to recognize the need to balance an accommodating investment climate to ensure Brazil’s fast-growing energy needs are met with fiscal terms that allow the country to earn fair return on its prolific natural resource base. For Petrobras in particular we think that its strategy to invest in its currently unprofitable gas and energy segment, expand refining capacity in Brazil, encourage the local construction of a large number of drilling rigs, and call for a potential move to production sharing contracts for future pre-salt leases indicate that the company’s interests are well-aligned with those of the state. We continue to believe that this should help position it to maintain a dominant position in the pre-salt trend to the benefit of Petrobras shareholders and the country of Brazil.
Valuation
We see 48% upside to our $97, 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risks include sustained lower oil prices and depreciation of the real. |
