Top Brazil Hedge Fund Picks State Oil Giant as Next Big Bet

(Bloomberg) -- One of Brazil’s best-performing hedge funds has been scooping up the shares of state-controlled oil giant Petroleo Brasileiro SA.

Joao Braga and Marcos Peixoto, who manage 5 billion reais ($1.3 billion) at XP Asset Management, have increased their stake in Petrobras, as the company is known, making it the biggest holding of their XP Long Biased fund even as the oil producer’s rally has outpaced the benchmark.

“The stock is cheap,” Braga said in an interview at XP’s Sao Paulo offices. “Management is good, the company is deleveraging and there are the asset sales, which will be good for the company.”

XP’s increased bet was made in the aftermath of a controversy about the company’s diesel price policy. Shares fell as much as 8.7 percent the day after the government decided to halt a previously announced diesel price hike amid growing rumors of a new truckers’ strike, an episode that stoked fears of state intervention.

A few days later, Petrobras announced it would carry out the increase, which was seen as an initial step to regain the market’s confidence.

“In Brazil, we’ll always have a risk this happens again,” Peixoto said. “We cannot say that this is a risk-free position.”

The company’s asset-sale program will also help spruce up share prices, according to Braga. UBS estimates the company could raise between $15 billion and $20 billion by shedding assets, a process that might take up to 24 months to be concluded.

Fat to Burn

The duo also the company’s multiples in relation to crude prices to support their thesis. They see Petrobras trading at less than four times enterprise value to earnings before interest, tax, depreciation and amortization at current oil levels, compared to six times historically.

“That means even if oil goes down, Petrobras doesn’t have to go down, because it has a lot of fat to burn,” Braga said.

The XP Long Biased fund, which has outperformed 99 percent of its peers in the past 3 years, with a 153.6 percent total return, also has large holdings in Qualicorp SA and Cia de Saneamento do Parana shares.

--With assistance from Shin Pei.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Felipe Marques in Sao Paulo at fmarques10@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Julia Leite

©2019 Bloomberg L.P.