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Investing in Petrobras

Written By Brian Hicks

Posted May 30, 2008

Editor’s Note:

After receiving this question, we wanted to answer it publicly.

"Ian, I bought Visa at $75 and sold half for a $10 gain, as you suggested, but I’m flipping out because it’s now under $80.  I’m a bit worried.  Should I sell," asked a Wealth Daily and SC Trading Pit reader.

Thanks for the question.

Our $100 price target on Visa was just solidified by Sun Trust Robinson Humphrey. They just raised their price target on Visa from $87 to $100.  They even raised 2008, 2009 and 2010 EPS estimates to $2.11, $2.96 and $3.82, thanks to volume growth, pricing power and operating leverage, as compared to prior 2008, 2009 and 2010 estimates of $2.04, $2.69 and $3.55.

We see no reason to sell the second half of the Visa stock.  They do not have exposure to consumer debt.  None…  What you saw was profit taking by weak hands.  That’s it.  This is a long-term hold with a price target of $100.  The S&P Ratings Services just assigned an "A+" credit rating to Visa, reporting "the credit card network has a hearty share of the global credit card market and has minimal exposure to credit risk."

Better still, Visa just ran to $86.95 on Thursday on the heels of MasterCard revenue guidance.  "MasterCard forecast average annual net revenue growth of between 12 percent and 15 percent and average annual profit growth of between 20 percent and 30 percent."

Today’s Wealth Daily: Why Petrobras Stock is Headed to $100

After a stock split, investing in Petrobras (PBR:NYSE) has become even more attractive.  At $71, you’re buying a dividend paying $314 billion company with a P/E of 24, $103 billion in revenue, and $8 billion in cash. It’s a great long-term bet with $100 price targets, we told Energy and Capital readers last Saturday (this free publication appears on the Wealth Daily site, too). 

But what makes PBR an unmistakable long-term investment are oil and gas discoveries, and the fact that offshore explorations are more appealing, given geopolitical tensions.

Just this week, it was part of a multinational group of companies that struck oil in the deep waters of the Gulf of Mexico.  An exploration well called Stones #3 hit reservoirs of gas and oil in 7,500 feet of water, in which PBR holds a 25% stake.  Royal Dutch Shell, which drilled the well, holds a 35% stake.  Marathon Oil holds 25%, and ENI holds 15%.

The results, say PBR, confirms the potential of significant oil reserves in this type of reservoir.  



This is after discovering what could be the third largest oilfield in the world, an area that could contain 33 billion barrels of oil equivalent.  Once that’s confirmed, the field would dwarf the Tupi oil field, which carries an estimated eight billion barrels of reserves.  The company has plans to start pumping out in Q1 2009 from Tupi, the biggest Americas find since the 1976 Mexican discovery of the Cantarell field. 

Again, as we said last week, "Even if it takes years to see this oil potential, betting against a giant like PBR may not be the smartest move."

Even better, Standard & Poor’s just raised PBR to "BBB" from "BBB-" on "improved operating environment and sound fundamentals for oil prices, which support increased cash flows to finance its aggressive capital expenditures program."  The upgrade also reflects PBR’s medium-term growth opportunities. 

This is a $100 stock masquerading at $73.  Buy.  Hold.  Sit tight.  Continuation of high oil prices and the company’s large project inventory are future catalysts.

Petrobas Success No Fluke

Even Alberto Guimaraes, president of PBR’s Americas unit, argues that the company success is no fluke, arguing for further growth on grim world energy supply forecasts.

By 2030, energy consumption is expected to rise 50%, as large oil reserve discoveries become rare.

"Despite hefty increases in investment, the largest energy companies haven’t been able to increase their output. Oil and natural gas production at the world’s nine largest international energy companies was down 1.7% last year, to 23.5 million barrels per day. Petrobras was an exception. Its output rose slightly, to 2.3 million barrels per day," says Business Week. 

And Guimares is promising even more output, with an output target of 3.5 million barrels a day by 2012.  "These are numbers the company can commit to," said Guimares in Business Week. "They are not speculation."

Plus… There’s No Shortage of Brazilian Growth

As I’ve said in prior articles, Brazil’s GDP is forecast to grow 4.8% this year after a 2007 expansion of 5.4%, and isn’t expected to be impacted much by the U.S. slowdown ripple effect. That’s because its exports to the U.S. makes up only 2.5% of Brazil’s GDP.

And if you need further reason to get bullish on Brazil, Citigroup believes the Brazilian Bovespa will end the year 10% higher at 74,000. "The main benefit of Brazil’s elevation to investment grade is yet further increases over time in capital inflows into Brazil, which should have the effect of raising the valuations attached to Brazilian financial asset prices,” said the bank.

Brazil has so much money laying around that it just announcing it was setting up a sovereign wealth fund, valued at between $10 billion and $20 billion.  That’s in addition to the Finance Minister’s unveiled $125 billion industrial policy plan to jumpstart new export and high tech industries.

Brazilian growth is just getting under way.  Petrobras (PBR:NYSE) remains our favored play in the region.

For similar opportunities, and to take part in "The Bakken Challenge", click here.

Good Investing,

Ian L. Cooper