An ‘Alternative’ to Playing the Brazil Oil Spill

Rudy Martin

Just as BP Plc. (BP) announced earlier this month that it was winding down its cleanup efforts from last year’s Gulf oil rig explosion, another spill (on another company’s watch) almost immediately took place off the coast of Brazil.

There are many clear losers in the aftermath of this disaster, not the least of which is U.S. oil major Chevron (CVX), which operates the leaking drill site. But there’s at least one potential winner, too, which we’ll discover in a moment. But first, let’s assess the damage to the parties involved in the Brazil spill.

Chevron’s Key Connection

To the BP Disaster

Chevron faces fines (currently estimated at $51 million) and reparations for its role in an oil spill at its Frade field, located a little over 200 miles off the Rio de Janeiro coast. The company has come under heavy fire by local officials for its handling of the November 8 incident, when a well blowout caused crude oil to seep up from the ocean bottom and create a slick on the surface.

Chevron operates Frade with a 51.75% stake, while the leading Brazilian oil company Petrobras (PBR) holds 30%, and Frade Japão the balance.

Brazil’s ANP says up to 2,640 barrels of oil may have already seeped into the Atlantic Ocean.

Here’s a recent view of the Brazil spill and clearly it’s not a pretty sight.

I’m no oil engineer, but this looks like a situation where Chevron may be underplaying the impact for obvious reasons. And while I’m not saying that this has the impact of the great BP oil spill in the Gulf of Mexico, there is at least one common denominator — that oil service provider Transocean (RIG) was involved here, too.

In response to this floating disaster, the stocks associated with Brazil’s deepwater oil fields have taken a pounding. Shares of Transocean dropped from $52 to $46 in less than 10 trading days. Chevron shares have also taken a bigger beating, from $109 to $95 in the same period. In contrast, PBR slipped from $28 to $26 in that two-week period.

Although Chevron officials declined to speculate about possible fines or legal issues surrounding the oil spill, they said Chevron takes “full responsibility” for a leaking well that left a slick of crude off the southeastern coast of Brazil and that the company is working closely with local authorities to clean it up.

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Will the Spill Impact Brazil’s

Production Potential?

The bigger risk is that this incident might affect Brazil’s offshore drilling elsewhere. Brazil as a whole could have a potential of the same size of the North Sea, including Norway and the U.K. (The North Sea reached peak production of 6 million barrels a day in 1999.)

Fortunately, from the Petrobras perspective, it is not currently expecting an impact on its offshore exploration and development programs. That’s a huge relief for PBR shareholders.

Petrobras alone has plans to invest $225 billion during 2011-’15 in oil exploration. The company plans to triple production to 6 million barrels a day by 2020.

Brazilian reserves that sit miles below the floor of the Atlantic Ocean — trapped under layers of rock and salt — hold an estimated 50 billion barrels of oil, according to the country’s oil regulator.

Brazil’s Lula (formerly called Tupi) represents the largest discovery in the Americas in over three decades. It had the country’s most-productive offshore wells and holds estimated recoverable reserves of 5 billion to 8 billion barrels of oil equivalent (boe).

Overall, Petrobras still expects it will reach its target of 2.1 million barrels a day of average oil production in Brazil for this year.

But that doesn’t mean the bad press is over on this issue. In fact, there’s more to this story …

Don’t Buy at These

Supposed ‘Value’ Prices

This week, officials from the country’s National Petroleum Agency (ANP), the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) and Rio de Janeiro are meeting to determine charges for the spill. In addition, the Federal Police opened an investigation and have said that company officials could face charges for damaging the environment.

Investigators have many questions about the drilling procedures as well as the quality and speed of the cleanup efforts.

Expect more news to come about this; it’s more likely that none of their future developments will be a positive for the primary participants.

What could this mean for you?

Personally, I’m not inclined to be a value buyer of PBR, CVX or RIG at these price levels — especially not with the looming uncertainty. Yet, I do see a silver lining elsewhere, especially in alternative energy for Brazil.

Alternative energy is key to Brazil’s domestic economy. Brazil is already in an enviable position when it comes to energy. Renewable sources represent at least 85% of the country’s electricity supply, according to the Energy Research Corp. (EPE).

The country has ample water, land and climate to make renewable wind, solar and biomass a more significant part of the equation.

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In the alternative-energy area, I like the prospects for Cosan (CZZ), a stock that I have regularly recommended in the past to subscribers of my Emerging Market Winners newsletter. The company has a great franchise, plus the expertise and management to capitalize on alternative energies like ethanol and biomass.

CZZ is not currently on the buy list, but I’m watching it for an entry point below $11 per ADR share. To be one of the first to know when Cosan — and other emerging-market growth plays — are ripe for the picking, take my service for a test-drive today!

Greenpeace Brazil claims that Brazil already allocates approximately 70% of the budget of the energy sector for the exploitation of oil and gas. This spill will reinforce the role of renewable energy in Brazil’s future, and this may actually draw some interest to Brazilian ethanol producers.

That’s my take on it.

Best wishes,

Rudy