Wednesday, September 3, 2008
Goldman's Option Strategist Recommends PBR Calls
Goldman's Option Strategist "is recommending the purchase of the PBR April-09 55 calls for 4.70 (9.5% of shares) ahead of an important analyst day expected in October. Goldman Sachs Integrated Oil analyst Arjun Murti rates PBR BUY based on the company's long-term exposure to major oil resources in the Campos Basin and pre-salt plays offshore Brazil that should allow it to generate top-quartile production and cash flow growth an above-average returns. His forecast for 9.7% production growth per year between 2007 and 2010 and above-average ROCE of 27% over the same period compare favorably to the super-majority average production growth rate of 0.7%and average ROCE of 25%. In his view, the recent pull back in shares has been driven by concerns regarding the sustainability of higher oil prices, as well as potential changes to future contract terms in Brazil. However, our analyst believes contract uncertainties will ultimately be resolved in a manner that allows Petrobras to retain its dominant position and earn an acceptable rate of return, while supply contraints and non- OECD demand continue to support high oil prices. As a result, he thinks PBR shares could double over the next 2-3 years. In the near term, PBR’s analyst day in October will be an important catalyst as the company is likely to discuss (1) its production profile; (2) CAPEX; and (3) the potential of new pre-salt opportunities. PBR 6-month implied volatility (42%,22nd percentile) is below average in absolute terms, relative to Latam peers and is near a 2-year low relative to WOW Energy peers. Given our analyst’s bullish view, but also given remaining contract concerns and sliding oil prices, we like the risk/reward of owning 6-month calls relative to outright long share positions for upside with limited loss; werecommend buying Apr-09 $55 calls." Source: Goldman Sachs.