Trading The Brazilian Oil Mess

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past several weeks, Brazil has been home to some unusual drama in the energy sector. This has included drilling bans on Transocean (NYSE: RIG) and discussions about major divestitures by Petrobras (NYSE: PBR), the state-led petroleum company, to major global oil companies including BP (NYSE: BP), Chevron (NYSE: CVX) and Exxon-Mobil (NYSE: XOM). As the landscape shifts, particularly as it pertains to the Gulf of Mexico, energy investors are left to sort through the chaos. Ultimately, as the various positions in both the Gulf and Brazil shake out, the steps being taken by Petrobras to get its house in order are a positive sign making the stock an appealing candidate at current levels. As Transocean emerges from the ban on Brazilian operations, it also looks like an interesting play.

Legal Wrangling

In response to two oil spills at a Chevron-owned and Transocean-operated rig last November, a Brazilian prosecutor filed an $11 billion civil suit against the two companies. The same prosecutor later added criminal charges filed against several company executives. These problems were compounded on August 1st, when a judge granted an injunction to prevent both Chevron and Transocean from operating in Brazil. The suits immediately invoked attempted intervention by both Petrobras and the Brazilian regulator (the ANP). The company filed its own suit alleging the injunction would interfere with its exploration activities, while the ANP appealed the injunction, pointing out that it had sole statutory authority to regulate these types of activities.

While the ANP’s appeal was denied, based on the Petrobras suit another Brazilian judge lifted the ban on Transocean’s activities at all but the suspect Chevron site. While Chevron is not out of the woods yet, the move should prove to be a positive catalyst for both Transocean and Petrobras. Transocean currently has seven rigs operating under contract with Petrobras in the region, so a return to operation is critical for each company’s bottom line.

Gulf Activities

The ongoing drama in the Gulf of Mexico continues. In response to the BP oil spill that was a regular feature on every financial network in the world, the current administration attempted to place a ban on deep water drilling in the Gulf. After a judge acknowledged that the move overstepped the administration’s authority, it responded by grinding the permitting process to a near halt.

As time has passed, and several rounds of legal maneuvering have wasted additional time, the regular flow of business in the region has essentially returned. This is particularly good news for the three most likely buyers of the $6 billion assets owned by Petrobras in the Gulf. The divestiture is a part of a larger $14.5 billion dollar plan by the company to rid itself of non-core assets and streamline its operation. While the ultimate winner remains unknown, CEO Maria das Gracas Foster stated “We are very near to closing the deal.”

Petrobras experienced a decrease in both revenues and earnings per share in the most recent quarter, partially leading to the restructuring plans. For example earnings fell from $3.92 per share for the fiscal year to $3.08. These decreases have been trending over the past two years, leading not only to decreased investor confidence, but to less attractive financial ratios. The divestiture should address each of these problems simultaneously and set up the company to hit earnings expectations for next year which currently stand at $4.50.

The Trades

As the majors mentioned above – BP, Chevron and Exxon-Mobil – continue to plug along, the improving situation for both Transocean and Petrobras appear to be positive catalysts for positive price action. Despite weakness in recent numbers, each of these events is favorable for the Brazilian concern, while the mere ability to return to operation is bullish for Transocean. While the political and legal issues are far from resolved, investments in these two companies at current levels look solid.


Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and ExxonMobil. Motley Fool newsletter services recommend Chevron and Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus