After the sudden announcement on 14 May 2024, Magda Chambriard will soon replace Jean Paul Prates as the CEO of Petrobras. In the fallout, commentators scramble to assess the various ramifications. One of the most agreeable consequences is that the company will invest more and pay less dividends.
Indeed, besides what the change means for political interference and corporate governance in general, the capital allocation underpinnings are obvious. As dividend policy was one of the main disagreements between Prates and certain factions of the Brazilian government, dividends will likely go down and investments, up.
But investments in what?
Oil and Gas Keynesianism
Based on her political bosses’ convictions and her own previous comments, one should expect Magda Chambriard’s mandate at Petrobras to be tightly connected to industrial policy. Projects will be measured not only by their risk-return profiles, but also by their capacity to add value to industrial production in Brazil and the creation of local jobs. Petrobras did exactly that during the first two terms of Lula da Silva and Dilma Rousseff, with mixed long-term results. It was expected that Mr. Prates would put the company back on the same track, but the changes he was implementing were likely not sufficiently fast or deep enough to the ruling Partido dos Trabalhadores (Workers’ Party) liking. As a result, Ms. Chambriard’s tune could be inspired by Don McLean’s American Pie, “And I knew if I had my chance / That I could make those people dance / And maybe they’d be happy for a while”.
For investors in the maritime space, the challenge is thus to identify which listed firms are among “those people” invited to the dance floor. The natural candidates would be the local shipyards, but making money from shipbuilding has been historically difficult and there are no pure-play listed yards in Brazil. The exception is Seatrium (SGX:S51), which operates two yards in the country and is well-positioned for higher local content shipbuilding tenders. However, Brazil is far from being the only driver of the Singaporean firm’s business, which is underlined by its stock closing today at -11.67% on the back of its exclusion from the MSCI index.
Moving further up the value chain and focusing on locally listed firms, a few potential beneficiaries of the reshuffle at Petrobras are WEG (B3:WEGE3), Azevedo & Travassos (AZEV3, AZEV4), Inepar (INEP4) and Priner (PRNR3). They provide goods and services to oil and gas firms, both ashore and at sea. But here we are interested mainly in offshore developments, and it is tricky to forecast if the management shift at Petrobras will tilt to land-based investments or to offshore projects. Petrobras has many canceled, postponed or sold projects in onshore E&P, petrochemicals, refineries, biofuels and fertilizers that could be brought back to its active portfolio. As a result, it is too soon to know if offshore investments will actually increase and by how much.
What if they do? – one might argue that most possible outcomes will eventually show up in a thorough event tree. Then, such a development would be particularly positive to a few offshore stocks.
Bulls grazing offshore
In Brazil, the listed maritime stocks exposed to offshore businesses are Wilson Sons (B3:PORT3) and OceanPact (OPCT3). The former is more diversified (they own shipyards too, if you are really keen!) and has been much more profitable in the long run. However, OceanPact is more exposed to volatility, which can be a good thing in a hot OSV market scenario such as the one we find ourselves in.
But the truth is that most upside lies elsewhere, not within Brazil’s limited B3 stock exchange offerings. The segments that are heavily exposed to Brazil and Petrobras, such as rig operators (offshore drilling and FPSOs), subsea services and the broader offshore support vessel market have a lot to gain because any uptick in rates in Brazil would add strength to markets that are already tight. With the exception of floatels, which are still lagging behind (for example Prosafe, PRS.OL, is up 3.9% today but down 54% YTD), offshore stocks are booming.
In Oslo, the bullish momentum remains. DOF Group (DOFG.OL) is up 58% YTD, but target-price consensus compiled by Yahoo Finance still sees room for a further 12% climb. The company has 44% of its vessels operating in Brazil. Solstad Offshore (SOFF.OL) is up 26% YTD, with 30% of its fleet in Brazil. In New York, Tidewater (NYSE:TDW), the world’s largest OSV operator, is less exposed to the Brazilian market, but the company is firing on all cylinders, its stock up 50% YTD.
So, contrary to Mr. Lula da Silva’s and Ms. Chambriard’s best intentions, a significant part of the investment shift might still end up as dividends. But paid out in Oslo, Singapore or New York instead of São Paulo.
Disclaimer: The above article is for informational purposes only. We do not offer financial advice nor any valuation assessment, endorsement or recommendation to buy or sell any financial instruments or securities in any jurisdiction. Should you have any doubts about the meaning of the information provided herein, please contact your financial advisor.
Maritime South 