Oct 3, 2018 in Economics

Petrobras is a public company which means that it is mostly owned by the Brazilian government. The company has its headquarters in Rio de Janeiro and is one of the largest in the Latin American market based on its market value. Founded in 1953, the company mainly deals in oil and holds a near-monopoly on its production. With an average output of two million barrels per day, Petrobras is also the leading distributor of oil products in the Latin American market. The company is the largest oil business in Latin America, its average annual sales standing at $118.3 billion. According to Latin Business Chronicle’s ranking (Latin Business Chronicle 2011), Petrobras was chosen over 500 other companies The company has an average market capitalization of US $72.8 billion which is an impressive summation of its worth considering that it is valued at $133.5 billion. The company controls over 50% of the Latin American oil market which gives it the number one position in the oil industry. Its diverse financial goals are brought forth by the need of expansion. The company owes its impressive growth over the 2007-2009 period to the rising petrol prices in the world. The ever-increasing demand for oil has also been a significant factor that has led to the growth of the company.  This has been particularly evident in the emerging economies of the world where the company exports its products. The growth of Brazil and China also acts as a good reflector of the rise of the company. The other reason that can be attributed to the company’s growth is the majority ownership by the government. This gives the state a direct control over its finances and economic operations. The gigantic share of the Brazilian market makes the company enjoy a virtually monopolistic status. When the management realized that there were oil reserves in SantosBrazil, the prices of its stock rose by 19% overnight. The company is looked upon as a blue-chip one in the local stock exchange market (Bovespa). When a recession hit in 2007, the company was instrumental in maintaining the activities of the stock market. The company’s success can be summarized by the recent discoveries of oil fields.               

The company’s ambitious goals include financial increase and a 15% gallon tariff by the year 2015. In addition, the company has mobilized all of its assets in trying to stabilize Brazil’s infrastructure. It has also been donating to numerous charities to generate public awareness (Black 2007). The shareholders of the company include the Brazilian government and the Sovereign Wealth Fund which hold 54% and 5% of its shares respectively. The private stocks are traded in the local stock market.

Berkshire Hathaway

The American International Corporation is a holding which headquarters are located in Omaha. The company has several subdivisions and is involved in a number of investment projects. It also engages in property and causality insurance. The insurance activities are conducted by various local and international insurance companies. The insurance provides insurance and reinsurance services that are essential in the economic market. The insurance companies include Maryland-based GEICO  and General Re and the Berkshire Hathaway Assurance. The company is also involved in manufacturing, retailing, finance and financial products and equities. The company is known for its diversified investments as well as for being engaged in several industries. The most profitable one is the insurance industry in which the country has over 50% of the market. The company has a total equity of $157 billion in the market. Due to the diversity of the company, it has numerous goals when it comes to the way it foresees the market. The company projects an annual growth of 185% in the insurance sector from 2012 to 2016. The company has also projected an increase in the value of its assets from 2013 due to the global demand for property. As of 2006 the company’s annual profit stood at 19.23%. The increase in profits was largely due to the company’s heavy investment. Annual profits are calculated on the basis of a cumulative percentage of each of its businesses. The increase makes the company one of the most profitable businesses in the United States. The company has numerous non-financial goals (Warren 2012), the most important one being to give back to the society. This is through supporting learning objectives and the construction of schools in the United States and Africa. The group of companies that form the Berkshire Hathaway is mainly owned by Warren Buffet who owns nearly 100% of its shares.  

Financial Risks

Even though the two companies are financial giants, they face numerous financial risks. Financial risks are defined as the multiple risks that are connected to monetary business deals. As far as assets-based risks are concerned, the two companies face different risks. The changing interest rates in the market have become a key factor in the insurance industry where Berkshire operates. This is because of the great recession which lasted from 2007 to 2011, and also due to the fact that many companies went bankrupt after the recession hit. The petroleum industry in which Petrobras operates faces a lot of risks. The company is involved in many prepayment activities, therefore, because of the recession it has encountered numerous challenges, such as credit risks. The risks were primarily due to the amount of money that the institution lent to the public. Both companies have vast foreign investments, such as Petrobras’s investments in Africa. These investments are usually very risky and financial losses stemming from them may not be always realized. Therefore, if a company has overseas investments it is not assured of its security if there is a political rift within the host country. The two companies also face liquidity risks. An example includes Petrobras’ offshore oil mines that are not easily converted to liquid cash. The other company may also face risks, as it is not easy to convert the assets that it has. Equity risks are the risks that are involved with the prices of stocks. Since the two companies are involved in the stock market, equity-related risks are very high. The interest rates risk mainly affects the Berkshire business since it is involved in the insurance business. There are legal risks that are faced by the two companies since they are both involved in the business field that entails legal lawsuits. Petrobras company can proceed with heavy investments to curb the financial risks that it faces. Diversification is the only key that a company has if it wants to stay afloat in the business market (Smithson 1998). The Berkshire company can hedge its assets to reduce the risks that are involved in the numerous industries it operates. In the real sense, numerous companies have employed these options and have survived in the financial market for a long time.        

Petrobras

Investment

Petrobras has made numerous investments in 2010 and 2011. However, the most profitable investment the company has made is its $422.7 billion investment in offshore oil reserves. This investment could have turned the Brazilian Oil giant into one of the biggest oil companies in 2012. However, due to the fact that the company is owned by the government, there have been numerous plans to halt the investment because of the popular belief that it is a waste of money (Pearson 2011). The company has also purchased numerous assets in the Asian market to increase its investments. In addition, it has bought a number of small-sized oil companies as part of amalgamation process.

Financing

Petrobras’ financing in the year 2010 and 2011 was mainly from the government. The first major boost that the financial giant received was $24.1 billion from the sales of its shares. This was followed by an additional $19.1 in the year 2011 by the government (Pearson 2011).  

Operations

The company diversified its operations and mainly ventured into the Middle East to outsource its products. The company later increased its investments in Africa to maintain a steady flow of income. Due to the great recession in the United States, the company bought more assets that would be sold off to increase its financial worth. 

Marketing

The company has intensified its marketing in the year 2011. However, it increased its marketing techniques in the year 2010 since it was venturing into the Asian and Middle East markets (Black 2007).

Management

During the financial year 2010 to 2011, the company enjoyed numerous benefits and its CEO was voted as the best oil executive in the world. This led to numerous investments in the world to capitalize on the opportunity (Black 2007).

The stock value of the company for the year 2010 ended at 360. However, in the subsequent year, the company’s share value stood at 329 at the end of the year. This decline was mostly caused by the unrest in Arab countries. The company consequently enjoyed excellent returns in the middle of the year 2011 (Tilt 2011). These events affected the stock return which was high at the close of the year 2010, and got even higher in the middle of the year 2011. However, they ended the period at an all-time low eventually. The firm value of the company was never affected by these events and it was steadily rising ending up at a record high $308.6 billion. The tradable shares in the market were not affected either. The profitability of the company was high, the returns of equity were maintained, and they stood at 17% in the first quarter of the financial year 2010.  The return on assets was also high and the company recorded an 8% increase from the year 2009. This was during the first quarter of the year 2011. 

Berkshire Hathaway

Investment

In fiscal year 2010, the Berkshire Conglomerate made numerous investments (Miles 2003). The company increased its shares in the American Express Company to 12.6 %. It also increased its shares in the Coca-Cola Company from 7.9 to 8.6%, which was a considerable investment.

Financing

In fiscal year 2010, the company had an operating income of $19 billion. These were high finances and the corporation had a net income of $12billion dollars by the end of fiscal year 2010 (Miles 2003).

Operations

The company increased its operations in the flight services to include the Asian and Middle East countries in 2010. In addition, the company increased its output of building products (Miles 2003). 

Marketing

The company has increased its investments in Asia in 2010. This has been a positive increase in maintaining its level height as a conglomerate (Miles 2003).  

Management

Warren Buffet, the company’s CEO, was elected as one of the best entrepreneurs. This was a positive factor in increasing the company’s outlook. This was particularly true of the businesses it is involved in (Miles 2003).

The company has had a positive stock return as demonstrated in the figure below.

Petrobras

The share prices of Petrobras have been fluctuating as have share prices of many other companies. This inconsistency is, however, mainly leading to an increase. An example is January 15 when the share prices of the company closed at -31. The next day, the price opened at -31 but closed at +32. At the end of the year, the company’s share prices closed at +28 and opened at +30 (Haar 2003).

12:00

14:00

16:00

28.6

27.2

27.6

27.9

28.3

27.9

31.5

29.5

26.0

Source:  BM&FBOVESPA 2011

From the above trends distinct trends, it is evident that although the share prices fluctuate, the company can have a stable base and enjoy an optimistic outlook. There were upside breakouts and this is relevant for an investor as he or she can have a base on which to know where to invest (Haar 2003).

Monthly return

Over the last twelve months, monthly returns of Petrobras were at an average of 1.33%. This was due to an overall fluctuation of the value of stock. The percentage was quite good compared to other financial oil industry giants like BP (Haar 2003).  The company had an average monthly return of 1.16% for the same year.

Volatility

The company has had to increase the price of oil in order to offset the deficit that it had in the year 2011. It is calculated as:

U1=In {S1/S1-1}

The volatility of the company can be summed as:

Date

Adj.Close ($)

Simple

Compounded

24.4.2011

372

-0.135

-0.135

24.8.2011

377

0.090

0.090

24.10.2011

378

0.230

0.230

24.12.2012

399

-1.522

-1.532

Source: Haar 2011

This is a positive outlook as most companies enjoyed a consistently negative outlook in terms of returns. The overall trend of the three factors has been inconsistent. This has led to several discrepancies. However, they indicate that the company enjoys an optimistic outlook for future development.

Berkshire Hathaway

The share prices of Berkshire Conglomerate have enjoyed a positive growth. However, the trend has been changing from upward to downward. This can be seen from the table below.

12:00

14:00

16:00

29.8

24.1

28.8

26.9

25.5

29.0

35.1

25.9

24.6

Source:  NYSE Euronext 2011

Monthly return

Monthly returns of Berkshire Hathaway for the last twelve months have been at an average 1.65%. This avearge has helped the company maintain its stake as one of America’s leading business conglomerates. The other finacial giants working on the same basics failed to reach this levels and this is a positive aspect of the company as they were at 1.00% average (NYSE Euronext 2011).

Volatility

The Volatility of Berkshire for the twelve months can be summed up as follows:

24.4.2011

379

0.137

0.137

24.8.2011

377

-0.023

-0.023

24.10.2011

372

0.345

0.345

24.12.2012

386

1.576

1.576

24.4.2011

349

-0.135

-0.135

Source:  NYSE Euronext 2011

The changes were mainly due to the recovery from the Great Recession. Overall, the company had a positive gain compared to its competitors as most of them could not achieve positive figures in the volatility and were forced to close down (NYSE Euronext, 2011).

Current price-earnings (P/E) ratios and Tobin’s Qs of the selected  firms

Petrobras

P/E ratios

The P/E ratios are calculated as:

Market Value per Share

Earnings per Share (EPS)

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

4.5

5

5.2

6.1

6.9

6.5

6.9

4.9

7.1

Source:  Paul 2011

From the table it follows that the ratios for the company were at an average of 5 during the finacial year that ended on January 15.

Over the last five yars, the trend has predominantly been the same.

For other five firms in the same industry

Table 7: P/E ratios

BP

BHI

DVN

ENI

BJS

DO

ESV

RDC

WTI

E

9

9

-5

20.9

9

6

7

4

4

-2

Source:  Paul 2011

Unlike BP, the company had a downfall but compared to other companies, it had a good financial year (Paul, 2011).

Tobin’s Qs

Tobin’s q= (Equity Market Value + liabilities book Value)

                (Equity Book Value + Liabilities Book Value)

The Tobin’s Qs of Petrobras as compared to other firms can be summed up by the table below.

Year

alpha

Beta

Alpha2

Number of firms

2007

-0.027

(-15.0)

-0.037

(-14.0)

0.994

1635

2008

-0.076

(14.7)

-0.086

(15.7)

0.992

1630

2009

-0.046

(-14.5)

-0.046

(-13.5)

0.989

1600

2010

-0.085

(-19.7)

-0.095

(-18.7)

0.999

1590

2011

-0.081

(-15.3)

-0.091

(-14.3)

0.966

1670

Berkshire Hathaway

P/E ratios

The P/E ratios for the conglomerate are as follows.

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

4.5

4.6

5.0

5.4

5.5

5.4

4.5

4.8

7.3

Source: NYSE Euronext 2011

From the table, the average ratios were calculated at an average of 4.4

For other five firms in the same industry

Table 10: P/E Ratios

AI

RI

SET

RTS

F

GT

    TH

IGV

BI

9

9

-5

20.9

9

6

7

4

4

With the exception of American insurance, all the other companies’ indices were low as compared to Berkshire Hathaway.

Tobin’s Qs

Year

alpha

Beta

Alpha2

Number of firms

2007

-0.023

(-14.0)

-0.028

(-13.0)

0.884

1635

2008

-0.066

(13.8)

-0.066

(14.7)

0.882

1635

2009

-0.056

(-14.4)

-0.033

(-12.4)

0.878

1670

2010

-0.099

(-18.7)

-0.070

(-13.7)

0.888

1635

2011

-0.071

(-14.3)

-0.091

(-13.4)

0.866

1670

Source: NYSE Euronext 2011

The P/E for the two companies are constant and this gives them a significance as they are put together to show their financial position. There were no discrepancies.

They indicate that the two firms have strong assets, financial bases in the market and high stock values. 

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