Shares of Brazil's state-controlled oil company Petroleo Brasileiro (NYSE:PBR) -- usually shortened to Petrobras -- were up 12.2% in October, according to data provided by S&P Global Market Intelligence.
Petrobras' shares had been underperforming the market prior to the move. However, after the jump, shares have risen 23% so far this year, roughly matching the performance of the S&P 500, which is up 23.1% for 2019 to date. Petrobras' shares, though, have been far more volatile than the index.
Petrobras' shares were roughly tracking the market until the 22nd of the month:
That's when Reuters, in an exclusive report, announced that Petrobras was close to signing a deal with the Brazilian government to market all of the crude oil the government receives from private companies that produce offshore oil in Brazil.
Brazil's policy is to allow private companies to drill for oil in the offshore oil fields it owns. The companies bid for the rights to drill in certain blocks, but they are also required to hand over a percentage of that crude oil to the Brazilian government, in a process not unlike taxation.
Up until now, Brazil usually sold that crude directly on the spot oil market. That made sense, since the total amount of oil due to Brazil was only a few thousand barrels per day. However, recent offshore exploration in South America has revealed massive oil reserves, which has made the fields more attractive to private companies. A resulting wave of upcoming offshore drilling is expected to balloon that total to an estimated 500,000 barrels per day by 2028, according to Jose Eduardo Gerk, the Brazilian government official in charge of the process.
In its most recently reported quarter, Petrobras only produced 583,000 barrels of oil per day, so if everything goes according to plan, it would nearly double the amount of crude oil handled by Petrobras in 10 years -- with other companies doing most of the work! Small wonder that the stock jumped on the news.
Brazil held its biggest-ever oil auction on Nov. 6, and, well, things didn't go according to plan. The country had anticipated raising $25 billion in foreign investment as oil companies from across the globe fell over themselves to get a piece of the offshore action. What actually happened was that Petrobras bid the minimum on one of the four fields up for auction, a Petrobras-CNOOC joint venture bid the minimum on another, and nobody else bid on anything. Petrobras' shares tumbled 5% on the news.
Of course, there will be plenty of other opportunities in the future to receive bids from other energy companies on the unclaimed blocks. But for now, it looks as though the hype was premature. Until it becomes clear how this might all shake out, don't let it affect your thesis on Petrobras.