Replies to post #1532 on The Rising Influence of Rising Affluence

[DewDiligence]

Since you’re heading to Brazil, here’s something to read on the plane...

http://www.nytimes.com/2010/09/13/business/13views.html

›An Energy Player to Reckon With

By CHRISTOPHER SWANN and RICHARD BEALES
September 12, 2010

Eike Batista may soon be adding billions to his bank balance. Shares of the energy group OGX, the flagship vehicle of Mr. Batista, Brazil’s richest man, value its seven billion-odd barrels of shallow water oil reserves at about $5 apiece. That looks like a bargain against the $8.51 a barrel the government is extracting from Petrobras for deepwater crude. It’s no wonder China’s Sinopec Group and CNOOC are considering buying into OGX assets.

A $100 investment in OGX last September would now be worth $180, compared with a meager $80 in Petrobras and $113 in Brazil’s Bovespa stock index. Yet OGX could still be good value in the months ahead.

Here’s how a back-of-the-envelope assessment looks. OGX has a market capitalization of about $38 billion and doesn’t yet generate any revenue. Simplistically, that means investors are placing a value of about $5 a barrel on OGX’s estimated seven billion barrels. These are yet to be turned into flowing crude, but they are largely in shallow water, making them easier and cheaper to develop than deepwater reserves.

Petrobras, meanwhile, is issuing $43 billion of stock to the Brazilian government in return for five billion barrels of untapped deepwater reserves — some 70 percent more a barrel than OGX’s reserves are worth [on a boe basis]. The state-controlled behemoth is likely to get preferential tax treatment, but it will also face greater technical challenges and expense extracting the crude. The government’s influence may also lead the company to make other investments with more social than financial returns.

OGX shares have recently fallen back, with some investors selling to free up cash to buy new Petrobras stock in a giant issue set to accompany the deal with the government. It’s hard to compare the two companies’ valuations directly. But if Petrobras’s latest deal with the government is a guide, China’s energy giants may have a better plan. OGX is essentially a start-up. But it could prove a cheaper bet than Petrobras on Brazil’s hot oil sector — minus the government meddling.‹