Petrobras is Repositioning Itself for the Future

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

I remember when Petrobras (NYSE: PBR) was an amazingly popular stock. Even saw a few articles talking about really high market caps for it, but I guess when the winds changed those articles were written about Apple instead. It is a cautionary tale that one must be ever vigilant.

There is much to dislike about Petrobras considering the Brazilian government's policies. The fuel price freeze and subsidies are problematic, especially with inflation still rising. With Petrobras expanding like it is, that is a troublesome situation. The company is doing a tactical retreat as I call it, because it is selling assets internationally to focus on the domestic situation. That always makes sense. You cannot be going about business abroad if your core is rotting. Petrobras is a national company, and it has to be where the oil is. The oil is in Brazil. I think selling international assets is a fantastic move.

When times were amazing the company just grew and grew. All the attention on the internet signaled to me that the stock was getting too crazy. I wrote calls on my position on the way up, and at one point I had to deliver my shares. I missed a little bit more upside, but I was lucky to get out when I did. I thought I missed out when I exited in the low 50s, and was looking to reopen a position. Life got in the way and it just fell off my list. Again I was just lucky. My exit and my lack of re-entry were luck.

Now that the company is not as ascendant in the public consciousness as it once was, I think it is worth revisiting. Especially, because it plans on divesting its assets and become more focused. There are concerns it will not get top dollar for its assets or whether it will even be able to get rid of them. There is always a price that will find a buyer, so it really is a question about how much of a discount it is willing to take. The company could use the cash though considering the debt and rising costs.

Debt is mounting, and judging by the length of the cost-cutting plan the company is not likely to see real benefit from these plans for a while. The cost-cutting plan is aggressive, and while it seems like a positive sign it has a gray cloud attached to that silver lining. To need to cut costs that aggressively in a comprehensive plan that extends to 2016 means the company expects to feel the pressure for that long. Vast profits do not seem to be around the corner.

Petrobras could form a good alternative in any portfolio to ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) if you are looking for something that could move more. There are tough issues weighing on Petrobras, but the Brazilian government is letting fuel prices rise some. That will give some relief to the company, but it might not be enough. The company will still have to grapple with rising costs and prices that do not move with those costs.

Petrobras has the benefit of being a national oil company of a nation that has a ton of oil. It is offshore in hard-to-reach locations, but there is a lot of it. Chevron and Exxon have to make agreements with at times unfriendly and sometimes fickle governments for access to oil. Natural gas in the U.S. is a boon to those companies so they can diversify, but at their core they are oil companies. So companies like Chevron will have to deal with hostile governments and lawsuits, while a company like Petrobras can secure a loan backed by its government. It is reasonable to assume that Petrobras has easier access to Brazil's oil reserves than an outside company and Chevron and Exxon are likely to continue having this problem as they look for more oil around the world.

Petrobras is not a private company, and companies controlled by the government can be extremely inefficient. I know most of this article was positive on the company, and the price is low enough that it might be worth a speculative investment, but that is all it is. If you prefer safety you should look elsewhere.

Chevron has its legal issues, but I think concerns about dividend cuts are overblown. If anything dividend growth will be more muted, but the legal troubles of Chevron do create an opening. The company is not going to roll over, and it will strongly defend itself and achieve a good settlement where possible. Legal cases take forever to resolve, so while there is news regarding the matter the market will be negative on Chevron. That gives you the opportunity to get more for less, but in the long term I think it is a good company. It has low debt, margins that are higher than some peers, and I see oil prices going higher over the next five years. With a dividend over 3% it is a nice reward for holding onto the company through its tough times, or better yet taking a position when it is depressed.

It does not get much safer than Exxon. The company is a cash-generating machine, though margins are slightly lower than Chevron as is the dividend yield. Exxon is not mired in legal issues that get a lot of press, though that might change with the spill in the Yellowstone River. Even then it is likely to be on a smaller scale than Chevron's problems. Other than my expectation of an increase in oil prices, I do not see anything monumental in Exxon's near future. It is just an energy juggernaut, and you money is likely to be safer there than in Petrobras. Most likely it is safer than Chevron, but also has lower potential rewards.

TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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