Best Research Ideas

Petroleo Brasileiro S.A.–Beauty and the Beast 

—Iain Reid, Senior Equity Research Analyst, Global Integrated Oil

Jefferies expands coverage of the Global majors with this initiation on Petrobras with a BUY and R$26 target. We look in great detail at the world-class asset portfolio (has discovered the equivalent of the UK North Sea in just six years) and expect this resource base to increase further. The "beauty" is the upstream assets, which are the envy of all the major integrateds (which have largely missed out on the largesse of the pre-salt discoveries in Brazil), while the "beast" is poor downstream performance, currently unable to meet domestic demands. Despite concerns over resource development, we believe the new realism and pragmatism of Petrobras’ management team will enable current plans to be largely achieved. Our thesis is based on incredibly detailed field modeling of the upstream portfolio, combined with a forecast for domestic price increases restoring parity (and thus profitability) by 2014/15.