China is buying African oil and Libyan wells are pumping, getting traders excited about the continent’s theoretical energy wealth again. But instead of waiting for the drills to start turning, why not lock down exposure to the countries and companies we know have the crude?
The big players in the oil industry are grabbing ethanol opportunities on the prospect that a weaker dollar and global economic recovery will send crude prices back on the rally trail.
There is a lot of gossip about Petrobras this week leading up to the run-off for the Brazilian presidential elections on Sunday. Here is a road map through the main stories.
PBR (quote) shares spiked yesterday on rumors that the state-controlled company is going to announce another huge offshore discovery next week. Supposedly this will be the second-biggest ever, representing roughly 68 billion barrels of oil.
When you consider that the company just bought 5 billion barrels from the government as part of its recent recapitalization — or that the company currently has 30 billion barrels total in reserve — you can see that a 68 billion number is pretty enormous.
This “find” is apparently located in the middle of the existing Campos basin and pre-salt offshore area. Gossip points to BMS 9, BMS 12 and BMS 45 as the various fields in which all this oil has been found. Since PBR does not even own BMS 45 — Shell (RYDAF, quote) recently sold it to Total (TOT, quote) — you have to wonder how much homework people are doing.
Supposedly, President Lula held back the timing of this release to avoid getting in the way of the elections.
One interesting detail: PBR options have been very active lately. The front month ADR futures have spiked another 4 points and local volatility numbers are up 10 points — 7 of those points in the last two days.
Investors are skeptical about all of this, but it begs the question of who is behind these rumors and why they come at such a politically charged moment.
Cosan recently hosted its first New York investor day to give Wall Street a closer look at its top management from all its business segments: sugar, ethanol production, fuel distribution.
Key takeaways: Sugar prices should remain strong through 2011 and beyond, while M&A will remain a focus — although no acquisitions are expected in the long term, the company’s entrenched focus on sugar will probably expand into other food categories where it can apply its existing brand.
This Brazilian ethanol producer has drastically transformed its business — and its balance sheet — over the last two years, and is now a global investor’s primary choice when looking for exposure to either Brazil or the ethanol/sugar ecosystem.
Basically, BofAML thinks that as CZZ streamlines its operation now, it will provide a base for future organic growth and M&A. The fuel distribution venture with RYDAF will unlock synergies, while corporate governance is improving.
This is generally bullish for the company over the long term. CZZ may end up a global powerhouse brand — and as sugar markets heat up around the world, that could mean a great deal in the long term.
News that the Environmental Protection Agency is letting fuel refiners add another 5% of ethanol to their blends has boosted shares of ethanol producers. Think of Cosan at times like this.
The EPA gave the battered industry a lift yesterday by announcing that so-called E15 — 15% ethanol, 85% petroleum products and other additives — grades of fuel are now acceptable for relatively new cars manufactured in 2007 and up. For older vehicles, results of ongoing performance testing should be revealed sometime next month.
Shares of companies throughout the ethanol supply chain surged yesterday afternoon and are looking very likely to continue their rally at the open today. These names range from seed giant Archer Daniels Midland (ADM, quote) to the multitude of struggling start-up distilling companies hoping to get a few gallons more of their product into American cars.
The implications for emerging markets ethanol producers have been positive also, although market response has been slow.
And these days, if you are buying CZZ for ethanol, you had might as well look at partner Shell (RYDAF, quote) as a pair option.
RYDAF has aligned its business more and more with CZZ, most recently agreeing to merge its fuel distribution assets with CZZ’s ethanol business. This means any benefit CZZ sees from changing U.S. fuel standards will eventually translate into cash for RYDAF as well.
And of course, the more grain that people pour down their gas tanks instead of their own mouths, the higher corn and wheat prices seem likely to go in the future. Stay on the food play in all its forms: ADM, but also fertilizer names like MOS (quote) and AGU (quote)
Brazil’s big sugar producer Cosan has defied traders’ grousing and has actually signed a $21 billion joint venture agreement with fuel distributor Royal Dutch Shell.
Under terms of the deal, each partner will control the assets it puts into the venture, ensuring that in-house expertise is respected.
How to trade it
This is a biofuel powerhouse in the making and a key long-term trade. CZZ has held the $10 level fairly nicely. Today should test whether it can break up and out of that range.