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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.




Petroleo Brasileiro - commonly known as  Petrobras (NYSE: PBR)

Acclaimed investor George Soros has been buying heavily into Petrobas lately.
Petrobras is Brazil’s state-controlled oil company.  It’s a wise investment in our opinion.

These are the reasons why:

1) New discoveries. Worldwide oil demand might be off their highs, but we believe that is a  temporary situation.  Even if demand miraculously plateaus, the world will still need to find another producer the size of Saudi Arabia every  three years, to keep up with demand for oil. Petrobras is making new discoveries. The company’s recent finds could triple its reserves. And as we all know, the country with the oil is always in control!

2) Long-term focus. With crude oil below $40 per barrel, most oil companies are cutting back on exploration and development.  But, not  Petrobras. They plan to spend $174 billion by 2013, which ensures they will have plenty of products to sell when oil prices climb higher again.

3) Low cost. Management estimates it can be profitable on new projects, even if crude oil stays around $45 per barrel. There are very few major oil producers that can claim such a low hurdle rate.  Basic economic principles govern here - the low cost provider of a commodity enjoys the most profits when  prices rise. And share prices often go up in tandem too.

4) Deep-water expertise. All the easily accessible crude oil is gone. But Petrobras is an expert in deep-water exploration. That gives Petrobas a competitive advantage that no other oil company can touch.  This should continue to help Petrobras add reserves at much lower costs than its peers.

5) Valuation. Emerging markets have been hammered in the last 6 months. Despite stronger underlying fundamentals, they have suffered worse than the USA.  The result is that many high quality stocks got caught up in the downward spiral and are now trading at bargain basement levels.

6) Chinese Deal.  In mid February Petrobras announced it has signed two Memorandums of understanding with Chinese institutions and an export oil contract with UNIPEC Asia Co. Ltd. - a subsidiary of China Petrochemical Corporation, or SINOPEC . The deal is to export around 100 thousand barrels of oil per day.

Petrobras is a good company that has been dragged down with all the rest in the turbulence of the last year. It is trading on a P/E of less than 10. This represents bargain buying right now.

George Soros could be onto something here. His sizeable investment and track record  are worth noting. Last year his Quantum Endowment Fund returned 8%, compared to a minus18%  for the average hedge fund .

This is a good company in an emerging market, so the stock will be volatile. But at current prices this looks like great value.
Buy Petrobras (NYSE:PBR) up to $30


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.