Stock of the Day - January 13, 2009

Petroleo Brasileiro (PBR)

Petroleo Brasileiro (PBR), commonly known as Petrobras, is a Brazilian company that engages in the exploration, exploitation, and production of oil. Petrobras is Brazil’s main oil supplier, and the Brazilian Government holds a 49% stake in the company. At the end of 2007, Petrobras controlled 98.4% of Brazil’s refining capacity.

Like any oil company, Petrobras’ stock price is extremely cyclical. That means that when the economy is doing well and oil is in high demand, Petrobras’ stock does very well. In times of recession, when oil is in low demand, Petrobras’ stock falters. This fact explains why Petrobras is currently trading in the mid-20’s while the 52-week high was $77.61.

Although the stock has been crushed recently, I see this stock rebounding very well once the world economy starts to show signs of life. Petrobras is actually one of my favorite stocks for 2009, as I believe it has unlimited potential when oil prices begin to shoot back up sometime later this year.

The first factor that makes Petrobras so intriguing is the fact that it has a monopoly on the oil industry in Brazil. Brazil, along with China and India, is an emerging market with a ton of potential. The fact that Petrobras has a monopoly on all of the oil and gas used in such a high-growth Brazilian economy gives the company unlimited potential. Imagine how profitable a company like Exxon-Mobil would be if it was the only oil producer and refiner in America. Without any competition, Petrobras will continue shine in Brazil.

Not only is Petrobras attractive because it has a monopoly in one of the fastest growing economies in the world, but it is also attractive because it continues to find huge oil reserves off the coast of Brazil. Just last year, the oil company discovered one of the largest offshore oil fields on earth off the coast of Rio de Janeiro.

The company is also growing its business operations to other countries, as it exported a record-high of 620,000 barrels per day in December. 63% of these exports went to the United States and 21% went to Europe. This growth during one of the world’s worst recessions proves to me that Petrobras is poised to break many more records once demand for oil begins to make a comeback.

Another reason I love Petrobras is because it has potential both for the short-term (under a year) and the long-term (over a year). For the short-term, the company has taken very good care of its debt and will steer clear of financial trouble throughout the rest of the recession. In addition, the fact that the Brazilian government and economy has such a vested interest in seeing Petrobras be successful, the oil company always has a lifeline to protect it. Another reason that Petrobras is so attractive in the short-term is because sooner or later the economy will rebound and oil prices will start rising again to over $40-$50 per barrel. Once this happens, a company like Petrobras that has so much potential will see its stock price bounce back extremely quickly.

So, now that it is clear that Petrobras is safe and is full of potential in the short-term, we must look to the long term. The fact that Petrobras is sitting on so much excess oil and is continuing to find giant offshore reserves on a regular basis shows that this company has unlimited growth potential and will become a world power in the oil industry before many people expect. With its great management and proven track record of success, I am confident that the company will use the excess oil from these reserves to make huge profits in the future.

I absolutely love Petrobras, and I have been eyeing this stock for months. I regret hesitating and not buying the stock when it was around $18, as it is now at $25.39. I will definitely buy this stock one day, but I feel like it still might be a little too early to purchase stock in an oil company during these volatile times. If it goes back down to the $22’s or low $23’s, I highly suggest you buy this stock. Petrobras has unlimited potential, and within 5-10 years, it could possibly be vying for the title as one of the top oil companies in the world.

Niki Pezeshki
-College Trillionaire