Edinburgh Partners, managed by Sandy Nairn, is a Scotland-based hedge fund with an additional office in New York City. Originally established in 2003, the fund now has an estimated $13.5 billion in assets under management, with a 13F portfolio value of nearly $2.4 billion. Edinburgh Partners invests in global equities using primarily a bottom-up, fundamentals driven approach, and also pays close attention to a company’s earnings outlook over a five-year time horizon.
Like many of the world’s most successful hedge funds, Edinburgh Partners is especially focused on companies whose stocks are trading below their historical average earnings multiples. Unlike many of his peers, however, Sandy Nairn strongly believes that too much diversification whittles away any potential for absolute returns, as the fund’s 13F portfolio amassed just 19 stocks as of its second quarter filing with the SEC.
In this 13F filing, it can also be seen that Edinburgh Partners currently allocates a significant amount of its holdings in Petroleo Brasileiro Petrobras SA (NYSE:PBR), a state-owned oil company in Brazil. Specifically, Nairn’s fund holds 9.9 million shares of the company worth a total value of $236.7 million. At the same time last year, Edinburgh Partners held over 11 million shares of the stock, though Petrobras still accounts for close to one-twelfth of the fund’s 13F portfolio.
Since the start of 2012, shares of the oil company have been a particularly middling investment, losing 2.7% while falling flatter than the integrated oil and gas industry’s average (4.0%), and peers like Exxon Mobile Corporation (NYSE:XOM) at 8.4%, Chevron Corporation (NYSE:CVX) at 10.1%, Statoil ASA (NYSE:STO) at 4.7%, and BP plc (NYSE:BP) at 1.2%.
Despite this moderate selloff in the short term, Petrobras may have the brightest future of any oil producing company over the longer run. In 2006, it was responsible for the discovery of the world’s first major oil field below the pre-salt layer, which is a region found in the South Atlantic Ocean off the coast of Brazil’s southernmost point. The Tupi Field, as it became called, was found to hold 6.5 billion barrels of proven reserves, enough to meet global demand for a little less than four months.
Over the next two years, the Carioca-Sugar Loaf and Iara oil fields were discovered in the same region as the Tupi field; the two are expected to hold 30-35 billion barrels of oil. These reserves are unproven, however, and also lie at a depth of 31,000 feet below sea level. Petrobras has committed nearly $230 billion to develop both fields over the next half-decade. In their entirety, these three findings virtually triple the size of Brazil’s oil reserves, placing the country on the same level as traditionally crude-rich powers like Saudi Arabia and the United States.
Looking at Petrobras specifically, its newfound oil wealth increases its reserve total more than twofold, as it lays claim to an estimated 70% of the oil fields mentioned above. With these discoveries, the Brazilian company is now amongst the world’s ten largest oil companies in terms of reserves, above Exxon Mobile, Chevron, and BP.
Due to the oil fields’ depth, Petrobras is estimating that its drilling and production costs will average between $35 and $45 a barrel, nearly three times more expensive than what companies like Exxon and Chevron spend. With oil prices currently flirting with the $100 mark, though, the company still has close to $1 trillion in potential profits tied up in the region, assuming all reserves can be extracted correctly.
When considering the fact that Petrobras has already been growing its revenues by 7.3% over the past three years – more than four times faster than the industry average – it’s hard to believe that its stock is trading at a discounted Price-to-Sales ratio (1.1X) more than 20% below its five-year average (1.4). This historical discount is more pronounced than the likes of Exxon Mobile (-10.0%), Chevron (+12.5%), and Statoil (-12.4%) combined.
Though the company's earnings have declined in nearly every year over this timeframe, it’s important to realize that research and development costs are primarily to blame. R&D came in at $4.1 billion in 2011 after totaling just $993 million in 2010, as company representatives have stated a need to develop more cost-effective ways to drill beneath the pre-salt layer. It has recently been announced that Petrobras is tackling this dilemma with the help of International Business Machines Corp. (NYSE:IBM), Schlumberger Limited (NYSE:SLB), and General Electric Company (NYSE:GE).
Looking ahead, it’s also important to mention that Petroleo Brasileiro Petrobras’s location gives it natural protection from any supply-side risks associated with the instability of the Middle East. The Brazilian economy has more than tripled in size over the past decade, and looks to provide adequate domestic energy demand. Equally as important, global oil demand is expected to grow by 850 million barrels over the next two years, with sustained growth over the long term. Due to its stake in Brazil’s massive oil wealth, Petrobras looks set to continue its emergence as a major player in the production of “black gold” for the next few decades to come.
Aside from Sandy Nairn, other hedge fund managers that are long Petrobras include Richard Driehaus, Crispin Odey, Steven Cohen, and Cliff Asness. For a complete look at the hedge fund industry’s holdings of this stock, continue reading here.