Is This Brazilian Oil Company Overrated?

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Brazilian oil fields may hold some of the world's largest oil reserves. However, things may not be all that smooth for the state-run Petroleo Brasileiro (NYS: PBR) . The emerging economy's quest to become an energy superpower could well be hindered, thanks to the typical problems generally faced by developing nations.

A potential landmine
Workers at Petrobras were evaluating a new deal from management that proposes to address various issues, including that of safety. However, if the deal fails to get approval, a strike is set to begin tomorrow, after being postponed last week. It doesn't look good, with some of the states already rejecting the offer.

No doubt, Brazil's massive oil discoveries in recent times should propel the country onto the world energy map. But the question is: How soon can investors look up to this nation's oil reserves as potential investing goldmines? In short, it may take awhile.

Unimpressive figures
Despite the company making one of the biggest discoveries in the form of the Tupi oil field in 2007, Petrobras' shares have been in a state of constant decline, falling 47% in the last two years. The latest quarterly results aren't too impressive either.

Revenues did grow, but net income dropped 26% in the third quarter compared to last year. This is the result of a declining Brazilian real, which has driven up the company's cost of debt. Brazilian companies that hold their debt in U.S. dollars have borne the brunt after the Brazilian real declined as much as 14% since July. But should this be surprising? The Brazilian economy has been growing quickly, and rising inflation shouldn't really come as a surprise.

Still, cash flows have remained strong, thanks to rising crude prices. Also, higher price realizations should likely be a stable factor. Petrobras' ambitious projects are currently the largest in the world. The company expects its $225 billion offshore project to double daily production by 2020. Additionally, Petrobras has been mandated by law as the lead operator in Brazil's major deepwater exploration and production projects. This virtually shuts out competition here. But that doesn't mean things are looking smooth going ahead.

Bitten off more than it can chew?
Analysts believe this project is too big for the company to handle on its own. A major concern is exploitation of workers. The impending strike might make sense. In short, the problems faced by an emerging economy aren't easily solvable.

Another thing that needs attention is that, until a proper hike in production occurs, it's too early to estimate these deepwater reserves conclusively. As Fool analyst David Lee Smith had noted, ExxonMobil (NYS: XOM) and Hess (NYS: HES) had jumped into the fray, only to hit dry wells. China's Sinopec (NYS: SHI) and Chevron (NYS: CVX) have bought substantial interests here, but it remains to be seen how things ultimately turn out.

Foolish bottom line
Economic woes in the form of inflation along with a bunch of disgruntled workers don't really bode well for a company that dreams of becoming the world's largest publicly listed oil company by 2020. The coming year should give us a better perspective of the company's progress. We at The Motley Fool can help you keep a track of this company for the latest news and analysis. All you need to do is add it to your watchlist.

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At the time this article was published

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