Petrobras Goes From First to Worst Among 10 Biggest Oil Stocks

By Joe Carroll

Nov. 10 (Bloomberg) -- Petroleo Brasileiro SA, the investor darling among the world's largest oil companies in the first half of the year, has become the biggest loser.

Petrobras, as Brazil's state-controlled oil producer is known, is the worst performer among the top 10 publicly traded oil companies since May. The stock dropped 53 percent on concern falling energy prices and the global credit crisis will block or delay efforts to tap the biggest offshore discovery in the Americas in three decades. Earnings growth will slow from 80 percent in the third quarter to 6.2 percent next year, according to the averages of analyst estimates compiled by Bloomberg.

``The decline in oil prices and the current financial crises will at some level impact Petrobras,'' said Gianna Bern, president of Brookshire Advisory & Research Inc. in Flossmoor, Illinois. ``Deepwater exploration is a very high-cost, high-risk proposition, and $60 or $70 oil will prompt them to re-evaluate their highest-priority developments.''

Since passing Microsoft Corp. as the world's sixth-biggest corporation by market value in May, Petrobras has fallen to No. 31, behind drugmaker Pfizer Inc. and China Construction Bank Corp., according to data compiled by Bloomberg. The company may need to fund capital spending of more than $30 billion annually to tap offshore prospects, including its Tupi discovery announced last year, and it faces a market in which Latin American bond sales have plummeted.

``For those who don't have a lot of cash, it's getting very complicated, especially for those who hope to develop gigantic finds like those in Brazil,'' said Joseph Stanislaw, an economist and co-author of ``The Commanding Heights: The Battle for the World Economy.'' ``Normally, you would borrow to fund development of the fields, but I'm sure their ability to do that has become more difficult and constrained.''

Prices, Shares Collapse

Like Exxon Mobil Corp. and other major producers, Petrobras benefited as crude-oil futures in New York climbed to an all- time high above $147 a barrel in July. Petrobras doubled in market value between August 2007 and May of this year as price gains added trillions of dollars in value to Brazil's so-called sub-salt offshore petroleum deposits.

Since then, oil has dropped more than $80. Natural gas, which rose even faster than oil in this year's first half, has fallen 49 percent since the end of June.

Petrobras shares have dropped 57 percent since peaking in May. Stocks from Sao Paulo to Prague to Moscow had outsized declines over that period as investors shifted money out of emerging markets. Petrobras' ratio of stock price to estimated earnings per share is about 6.6, down from almost 22 in May.

Exxon, Shell, BP

Mirian Guaraciaba, a company spokeswoman, said Petrobras won't comment on the decline in market value until its third- quarter earnings report is released tomorrow.

Exxon Mobil, based in Irving, Texas, remains the world's largest company by market value. It trades at about 8.5 times estimated earnings. Houston-based ConocoPhillips and San Ramon, California-based Chevron Corp., as well as Royal Dutch Shell Plc, in The Hague, and London-based BP Plc have ratios between 4.5 and 6.5.

The outlook for slowing earnings growth also is weighing on shares of Rio de Janeiro-based Petrobras. The company probably will report tomorrow that third-quarter profit excluding one- time costs and gains jumped 80 percent to about 9.9 billion reais ($4.6 billion), according to analyst estimates compiled by Bloomberg.

Full-year profit growth probably will slow to 6.2 percent in 2009 from 51 percent this year because oil prices fell, the analyst predictions showed. Global demand for gasoline, diesel and other petroleum-derived fuels is forecast to expand next year at less than half the rate of the previous half decade, the International Energy Agency said last month.

Price Pressure

Falling energy prices may complicate efforts to exploit Tupi and neighboring offshore prospects. Drilling wells and constructing platforms to pump crude and gas from deposits that in some cases lie beneath six miles (10 kilometers) of sea and rock may cost $600 billion over the next few decades, Julio Bueno, industry secretary for Rio de Janeiro state, said in a September interview in London.

``Prices affect the economics of oil production, and there's a bottom commodity price below which a company won't produce a resource,'' said Don Goddard, a geologist at Louisiana State University's Center for Energy Studies in Baton Rouge.

Tupi may cost $100 billion to bring into production and operate, according to Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Petrobras had less than 1 percent of that amount in cash as of June 30. Exxon Mobil's cash hoard was 40 times that size, public filings showed.

Credit Needs

Petrobras is looking to become ``a more frequent issuer'' of bonds to help fund its offshore developments, Chief Financial Officer Almir Barbassa said in an April interview.

Less than $6 billion in Latin American bonds have been sold since the end of June, according to data compiled by Bloomberg, down 70 percent from the same period a year earlier.

``It's been very sporadic,'' said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York. ``Some months have been up, some months have been down. There's been nothing in October and almost nothing in September.''

Petrobras is scheduled to announce a new five-year capital spending plan next month. The company will raise spending 39 percent to about $170 billion to account for Tupi and other new fields that will be costly to develop, Subhojit Daripa, an analyst for at Morgan Stanley in Sao Paulo, said in a note to clients.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net.