Vinicius Andrade and Zijia Song, Bloomberg News

SAO PAULO/NEW YORK
EnergiesNet.com 11 10 2023

Rajiv Jain has become the biggest minority shareholder in Petrobras, often by snapping up shares when other investors were fleeing the stock. Now his confidence in the state-owned Brazilian oil company faces one of its biggest tests yet

GQG Partners Inc., the investment firm Jain helped set up in 2016, owns about 6% of company and has benefitted from a 59% surge in the stock since mid-December.

Whether that rally continues will be largely influenced by Petrobras’ five-year strategic plan, expected to be announced in the coming weeks. A larger-than-forecast jump in investment, or worse still, soaring expenditure on less-profitable projects could derail the gains. Yet Jain, no stranger to contrarian bets, remains unfazed.

“The stock has gone up a lot in the last 12 months, but risks have also gone down,” GQG investment analyst Siddharth Jain — Rajiv Jain’s son — said in an interview. “We’ve been adding to our position over the past few months because even after a rally, this is still, in our opinion, the cheapest large cap stock in the world.”

He has a point. Even after Petrobras has added 176 billion reais ($36 billion) in market value since hitting its December lows, shares currently trade at 3.8 times blended-forward 12-month earnings, the cheapest in a basket of 20 global peers tracked by Bloomberg. Even Argentina’s state-controlled YPF SA trades at more than double that level.

The Brazilian company reports third-quarter earnings after the close on Thursday.

New CEO

GQG, which also placed sizable bets on names such as Indian conglomerate Adani Group, first announced a 5% holding in Petrobras at the end of last year, when many traders were spooked by leftist President Luiz Inacio Lula da Silva’s election and his constant attack on the company — from its fuel-pricing policy to its multibillion-dollar distribution of dividends.

And while Petrobras looks cheap, many investors remain on edge over the first investment plan drawn up by Jean Paul Prates, who took over the company this year after being appointed as CEO by the Lula administration. Goldman Sachs Group Inc. analysts led by Bruno Amorim said this week that they see the announcement as a “potential short-term risk.”

Prates has already started making changes. The oil producer unveiled a new policy in July that cuts dividend payments. The board also proposed changes to Petrobras’ bylaws that would narrow the potential for future extraordinary payments. 

For GQG, that is not a radical enough change to backtrack on the bet.

“There have been some changes I don’t necessarily agree with, but things aren’t that bad,” Siddharth Jain said.

Now, with the five-year plan, comes the real test.

The Plan

Investors are expecting total capital expenditure to be higher than the previous plan’s $78 billion figure, with estimates from sell-side and buy-side analysts ranging between $85 to $95 billion, according to data compiled by Bloomberg. Prates is signaling that Petrobras intends to earmark up to 15% of its total investments toward renewable energy and low carbon projects.

“Capex will go up, but we are not expecting any massive increase like doubling investments — it takes a long time for these projects to go through the approval process,” said Jain. While a large-scale acquisition or more aggressive increase in capex would be concerning, the fund is giving Petrobras “the benefit of doubt for now,” he said.

Other investors have also bet heavily on Petrobras.

Andrew Keiller, a partner at Baillie Gifford & Co who oversees the Baillie Gifford Emerging Markets Equities fund, started building his position in Petrobras around 2016 and 2017. The stock now represents 5.6% of the fund, its third-largest holding, prompting Keiller to make “small reductions” recently. It was the main positive contributor to the fund over the past five years.

Some investors cite lessons learned from the Carwash corruption scandal that embroiled Petrobras around 2014 for their confidence in the company’s corporate governance. The margin of maneuver for dramatic changes has narrowed, according to Andre Lion, a portfolio manager at Ibiuna Investimentos and three-decade veteran of investing in Brazilian stocks.

“Of course some of the recent changes aren’t good,” he said. “But is it the end of the investment thesis? We don’t think so.”

–With assistance from Mariana Durao

bloomberg.com 11 09 2023