General

Musings On Markets

A few months ago, I suggested that investors endeavor where it is darkest, the nether parts of the corporate world where country risk, product company, and risk all collide to produce trading quicksand. I still own both companies that I highlighted in that post, Vale, and Lukoil, and have no regrets, even though I have lost money on both.

At the time of the post, I used to be asked why I had not selected Brazil’s other commodity colossus, Petrobras, as my company to value (and spend money on) and I dodged the question. The news from the last few days offers an incomplete answer, but I think that the Petrobras experience, painful though it might have been for some investors, provides an illustration of the costs and advantages of political patronage.

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Petrobras was founded in 1953 as the Brazilian government oil company, as well as for the first few years of its life, it was run as a government-owned company from its head office in Rio De Janeiro. Until 1997, it acquired a legal monopoly on essential oil distribution and creation in Brazil, when the home market was exposed to foreign essential oil suppliers. Petrobras was detailed as a public company in 1997 on the Sao Paulo exchange so that as a depository receipt on the brand-new York Stock Exchange immediately after.

In the last decade, Petrobras has seen both lows and highs, becoming the fifth-largest company in the global world, in conditions of market capitalization, in 2011 and then viewing a precipitous fall off in market prices in the entire years since. To understand where Petrobras is also to make sense of where it is going now, you have to look at both its rise within the last decade and its fall in that one.

The rise of Petrobras from small emerging market oil company to global large between 2002 and 2010 can be traced to three factors. The first was the finding of major new reserves in Brazil in the early part of the last decade, which catapulted the ongoing company near the top of the list of companies with proven reserves.

The fact these reserves would be costly to build up was mitigated by another development, that was the continual surge in oil prices to triple-digit levels for a lot of the period, making them viable. 72.8 billion from collateral marketplaces. The hubris that resulted in the public offering may have been the cause for the next fall of the company, which has been dizzying because of the magnitude of the decrease, and its swiftness.