As an Englishman living in the US, I am feeling very important at the moment. Every American I know is asking my opinion on the World Cup. Why they think I, as a native of a country with a 48 year history of ridiculously exaggerated expectations and abject failure in the world’s biggest sporting event, should have any special insight is a mystery to me, but they do.
The usual question is who I believe the winner will be. This poses a problem. I cannot, in all honesty, satisfy their own ridiculous hopes and expectations by declaring the USA as a possible winner. Not even their coach, Jurgen Klinsmann, believes that. Nor can I give England as a possible winner with a straight face. The obvious answer, Brazil, is just that… boring and obvious, so I have taken to giving a somewhat quirky answer. When asked who will emerge victorious from the World Cup, I have taken to answering “Petrobras” (PBR).
Believe me I am all too aware that, as the above chart would suggest, Wall Street and the internet are littered with those whose careers have been killed by finding value in the state-owned Brazilian oil company. I have no wish to join their ranks, but the World Cup could provide the catalyst for a turnaround in the company’s fortunes. No, I’m not talking about floodlight use creating electricity demand or more buses and trains running, increasing oil consumption. The way in which 32 national teams kicking balls around over the next few weeks could benefit PRB is much more complex than that.
In the run up to the event, most of the attention has been on two things. Firstly, the needed construction was behind schedule. Forgive my world-weariness, but don’t we hear this before every major sporting contest, and aren’t things always ready on time? If you paid attention to the reports it is a miracle that anything happened in Beijing in 2008, South Africa in 2010, London in 2012 or Sochi earlier this year, but they all took place.
It is the second center of the world’s attention, the protests centered around the World Cup, which hold the key to an improvement in the fortunes of Petrobras. These demonstrations have ostensibly been about the cost of the tournament, but the complaints of the protestors are generally more fundamental. They are upset that corruption and inequality persist in Brazil and the protestors form part of a growing opposition to the re-election of the President, Dilma Rousseff. They are looking for economic reform above all else.
Not too long ago Rousseff looked unbeatable, but she has been slipping in the polls as the tournament approaches and the protests intensify. I am not an expert on Brazilian politics and don’t pretend to know if a change in President is likely or not. What is for sure, though, is that the October election will now be fought on the economy, and on corruption in particular. That is what will be good for Petrobras.
Brazil has enormous oil and gas reserves. That is what has led to many getting in the way as PBR has fallen out of bed. The problem is that de-risking those reserves requires enormous inward investment of both capital and technology. When corruption is endemic and the oil industry, as a state owned monopoly, is more of a political football than a business, those two things have been virtually non-existent. Even if Rousseff does hang on and win, the election looks sure to offer the possibility of a crackdown on corruption and an economic environment more attractive to foreign companies.
The prospect of any inward investment will, of course, benefit the Brazilian economy as a whole, but, given the potential that has fooled so many to this point, PBR would probably offer the most upside in the event when it comes. A forward P/E below 8 would certainly suggest that.
I will be watching the World Cup with interest over the coming weeks. Despite the lessons of history and what is generally considered to be a sub-par squad even for them, I will be cheering on England with the kind of blind hope and faith that only sports fans can muster. When they suffer the inevitable defeat, though, I will continue to keep an eye on Brazil, and specifically on PBR.