Why Are the Bears Piling On to These Two Oil Majors?

It's a pretty good bet to be in the oil industry today. Global demand is on a steady incline, prices are hovering in the very lucrative $110 range, and advances in technology are making challenging projects profitable. Despite the overall glow in the oil industry, some investors are looking at two oil majors with less excitement: Petrobras (NYSE: PBR  ) and Total (NYSE: TOT  ) . According to The Wall Street Journal, the total shares sold short in August for Petrobras and Total have increased by 165% and 85%, respectively. Do these companies warrant this bearish sentiment? Let's look at both companies to see what's coming down the pipe. 

Source: BP Media Relations.

Petrobras petering out?
It's pretty easy to see why so many people would not be big fans of Petrobras' future. After taking years to develop the pre-salt formation off the Brazilian coast, the company finds its production levels still stagnant. Part of the problem comes down to the company's decision to divest a large chunk of its international assets to help fund its developments within Brazil, but the in-country production hasn't grown fast enough to cover the losses from those sales. In fact, in-country production has slipped almost 5% since the beginning of the year. To make matters worse, the Brazilian government controls gasoline prices and has kept them below what it costs for Petrobras to either import gasoline or produce it itself. As a result, the company takes perpetual losses on its downstream operations

Despite the disappointing results, there are some bright spots worth noting. CEO Graca Foster has implemented am operational efficiency program looking to cut $1.7 billion from its annual budget. In the first half of this year, the company achieved 78% of that goal. Also, as part of its $237 billion investment program to revamp the domestic oil industry, the company is developing 1.46 million barrels per day of nameplate production capacity, with 13 projects in the Santos Basin scheduled to come online between now and 2016. The jury is still out as to whether the company can complete these projects on time and on budget. But based on the track record of recent megaoil projects, it will take much longer and cost much more than originally anticipated. 

A total disaster?
For investors who may be looking to profit from a big fall in Total, there are probably two primary reasons why: upstream operations in higher-risk regions, and a sluggish downstream business. For the most part, the downstream operations are a product of location. A majority of its refineries and chemical facilities are in Europe, and weak economic growth has made earnings from these facilities suffer. For the upstream side, the company's production is very concentrated, as 72% of its oil comes from either the North Sea, West Africa, or the United Arab Eimirates. Each of these regions carries a high risk for various reasons.

Crime has made oil and gas production in Nigeria problematic for several companies in the region. Royal Dutch Shell (NYSE: RDS-A  ) estimates that theft and sabotage, along with an embargo on LNG tankers, will cost the company $12 billion this year alone. Shell, along with Total and Chevron (NYSE: CVX  ) , is looking to sell off onshore assets in Nigeria because of the ongoing problems, while focusing more on the offshore region. However, with the Nigerian national oil company making hints that it wants more control of the country's assets, these companies may be forced out of the offshore regions as well. Combine this with the operational hiccups Total has had in the North Sea recently, and the UAE looking to cut production to meet OPEC quotas, and the oil side of Total's business is not on the most stable footing.

What might give Total investors some comfort, though, is that it is diversifying its oil production. The company has announced major oil and gas finds off Ivory Coast and will bring 160,000 barrels per day of production from Angola online next year. Also, Total's joint venture with Saudi Aramco for the massive Jubail refinery and chemical plant is set to start operations this quarter.

What a Fool believes
Both Petrobras and Total may not be shining beacons of success in the oil industry today, but the prospects the two companies have make a short of these two companies rather difficult positions as well. While Petrobras may not be able to develop the pre-salt fields as efficiently as other major oil companies, the sheer size of these assets gives the company promise. Also, Total has a fair share of major assets coming online in the next several years on the upstream side that should help counterbalance the weak performance on the downstream side.

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