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Big Change or Status Quo at Petroleo?

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Petroleo Brasileiro (NYSE: PBR  ) , the state-owned Brazilian oil company affectionately known as Petrobras, is sitting on one of the world's most coveted oil plays. After a terrible fourth quarter, the company introduced a new CEO, but a change in leadership may not make a difference.

Maria das Gracas Silva Foster took the reins of the Brazilian company on Monday, becoming the first woman to run a giant oil company. Foster has been with Petrobras for 31 years and plans to maintain the company's operating philosophy. Now is as good a time as ever to review that strategy.

Petrobras operates a long-term policy for pricing fuels, allowing it to eradicate volatility from the consumer market and prevent price fluctuations from driving up inflation. What this also means is that when international crude prices or the Brazilian currency rise, Petrobras' downstream refining operations take a big hit. Theoretically, when crude prices fall, the company will recoup those losses because fuel prices will remain steady.

The fourth quarter
But that certainly wasn't the case in the fourth quarter of last year, as Petrobras missed analysts' earnings estimates by a wide mark. Expectations were set at 69 centavos a share; the company came in at 39. Net income was basically half of what it was the year before.

There are a multitude of reasons for missing so badly. First, costs rose. Petrobras was busy installing new production equipment in the offshore pre-salt region, an area that has the industry dizzy with excitement. The company also had an increase in work stoppages and paid out higher salaries.

The Brazilian currency didn't do Petrobras any favors either. The real fell against the dollar, increasing company debt payments and the cost of gasoline imports. Brazil imports light oil because most of its plants can't process the heavier crude the company produces.

Committing to the future
Petrobras' long-term goals remain unchanged at this point. The company plans to execute a $224 billion spending program over the next five years to develop its pre-salt fields, estimated to contain 50 billion barrels of oil.

In an effort to finance this plan, the company sold $7 billion in bonds in early February. Petrobras plans to borrow about $18 billion a year through 2015.

It will certainly need the money: Petrobras recently placed orders for 28 offshore rigs. The rigs come with 15-year contracts and cost anywhere from $530,000 to $548,000 a day. The company ordered 21 of those rigs from Sete Brasil, Petrobras' rig management company. National Oilwell Varco (NYSE: NOV  ) provided the rig equipment for the last seven Sete Brasil orders, and analysts expect the same partnership for this round of orders.

Foolish takeaway
Petrobras is caught in a bit of a Catch-22 right now. Increasing production in its pre-salt fields is costly, and thus would benefit from a high price of oil. That same high price of oil, however, will kill the company on the downstream side of the business. In light of the intense borrowing the company needs to fund its five year goal, the performance of Brazil's currency may be what makes or breaks the future for Petrobras.

Stay up to date on company news and analysis by adding Petrobras to My Watchlist.

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter @TMFDuffy.

The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro and National Oilwell Varco. 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.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 15, 2012, at 12:16 PM, petroglyph wrote:

    PBR was a fabulous investment in the 2002-07 time period because Lula was a pleasant surprise, pretty much keeping his hands off the golden goose. Yes, there was more often a subsidy to domestic gas prices, but it was manageable.

    Since the discovery of the pre-salt fields, the politicians have not been as restrained. Shareholders have been subjected to a huge dilution, the effort to make work for the shipyards is a naked wealth transfer from PBR (and it's shareholders) to Brazil and the fuel subsidies have gotten worse.

    I've been long most of that time, but the stock has been morphing from a wealth creator to a value trap due to Brazilian politics. The allure is obvious, but do your homework, this is not just a story about huge reserves off shore.

  • Report this Comment On February 15, 2012, at 5:25 PM, StarWitchDoctor wrote:

    value trap, social engineering of consumer prices has cost me a bundle. It will be at least a decade before brazilian politics deliver another true leader. I will stay away. I too made money in the stock in the past.

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