Petrobras

 

Ah, Petrobras. Company that I love.

Disclosure: I've always loved the idea of Brazil. Give me a world-class company in Brazil, and one whose ticker is named after Pabst Blue Ribbon, and I may be a sucker.

Still, I think PBR at this level ($27.02 as I write this) is quite a value.

Look, most everyone has breathed a huge sigh of relief over the past few weeks as prices at the pump are hovering around $3 per gallon.

But $3 per gallon is twice as much as we spent for gas in 2004-2005.

In other words, the scarcity of oil remains. The consumer is cowered.

There is no industry that has moved up pricing so much so fast… or has the ability to do such… as Oil.

Yes, I lived through the $15/bbl. oil back in Midland, Texas in the summer of 1985. I remember the businesses closed, the vacant offices, the shear emptiness. We're not going back there again.

One simple fact: there are three to four times as many combustion engines out there as there were in 1985. Overall engine efficiency may be 20% to 30% better, but there are still 3 to 4 times as many of them on the planet.

Now, I don't know at what price point Joe the Indian Plumber decides to dust off his Toyota, or Molly Chang decides to go on a driving vacation. But I do know that they were willing to do so when oil was at $80/bbl, and I'd imagine that – if they still have some disposable income – they are revving their engines right now.

Oil will be bopping around $50 to $80 for awhile. Even if we go back to 2004 prices – oil rising from $30 to $50/bbl. -- Petrobras was still making $6 Billion.

I'm guessing that PBR's earnings at around $50/bbl. will average $9 Billion per year. At a current market cap of $118 Billion, that means PBR is trading at a sustainable 13 times earnings. So it's a little expensive on that basis, until you include the potential TWO TRILLION dollars of value that PBR may reap from its latest South Atlantic find.

Besides, it's in Brazil. And I've always loved Brazil.

Hmm… maybe this investment is just an excuse for a Shareholder Meeting in Sao Paolo…

 

• Patrick Garot