Professional Documents
Culture Documents
Documents - MX Petrobras Cost of Capital
Documents - MX Petrobras Cost of Capital
Petrleo Brasileiro S.A. (Petrobrs) was the national oil company of Brazil
Petrobrs was an integrated oil and gas producer which was publicly traded but 33% of its
ownership shares were still owned by the Brazilian government
The company was not internationally diversified in its operations, as all of its current oil and
gas operations were Brazilian when it went public in 2000
As a result of its lack of diversification, and being considered relatively risky as a result of
Brazils economic history, Petrobrs has a significantly higher cost of capital than most
other major oil and gas companies all over the world
Sovereign risk
Sovereign risk is the markets assessment of the risk associated with the governments
willingness and ability to repay U.S. dollar-denominated debt
Brazils sovereign risk had been as high as 24% and as low as 0.4% over the past decade
12-2
Petrobrs WACC:
Case Questions
1. Why do you think Petrobrss cost of capital is so high? Are there
better ways, or other ways, of calculating its weighted average cost of
capital?
2. Does this method of using the sovereign spread also compensate for
currency risk?
3. The final quote on ones view on the direction of the broad Brazilian
market suggests that potential investors consider the relative
attractiveness of Brazil in their investment decision. How does this
perception show up in the calculation of the companys cost of capital?
4. Is the cost of capital really a relevant factor in the competitiveness and
strategy of a company like Petrobrs? Does the corporate cost of capital
really affect competitiveness?
12-3
12-4
12-5
Petrobrs WACC:
Case Questions
1.
Most of the major multinational oil firms are treated equally, with comparable
costs of capital and assessments of their earning potential.
Petrobrs, however, was a Brazilian oil company which was distinctly domestic in
its activities. Even major oil companies like PDVSA, a Venezuelan oil company
(not discussed in the case), were considered of lower relative risk and possessed a
lower relative cost of capital because of the magnitude of their export sales.
Petrobrs was a Brazilian oil company producing for Brazilian markets.
There is good argument that the companys cost of capital should not be
burdened by the additional charges of the Brazilian sovereign spread when
calculating its cost of debt and equity. It is operating in a global industry which has
a global price, in U.S. dollars, and a global market, which could potentially be
accessed for sales if the company wished.
There are obviously a multitude of different ways to calculate the companys cost
of capital, but most methods would require some additional risk premium being
added to in some way compensate investors for the perceived risk of Brazilian
political or country risks (not particularly currency risks).
12-6
Petrobrs WACC:
Case Questions
2.
12-7
Petrobrs WACC:
Case Questions
3.
12-8
Petrobrs WACC:
Case Questions
4.
12-9
12-10
12-11