The words "it's always something" seem especially appropriate for Petrobras (NYSE:PBR) and its investors. While other major oil companies like Exxon Mobil (NYSE:XOM) or BP (NYSE:BP) would love to have the huge offshore reservoirs that Petrobras has discovered in recent years, the constant interference of the Brazilian government makes it an open question as to how much benefit shareholders will ultimately reap from these assets.

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Not only has the Brazilian government shown a willingness to rewrite the rules as necessary (and at the expense of shareholders), but price controls in gasoline and diesel make the already-difficult job of running a refining and marketing business even harder. If that wasn't enough, local content laws raise the specter of insufficient access to equipment, while Petrobras battles through the same difficulties in disappointing production growth and faster-declining fields as most other energy majors.

SEE: Investing In Brazil 101

Q1 Results Were Better, but Not by a Lot
While Petrobras beat estimates with its first quarter numbers, that was largely due to low expectations. Revenue did improve modestly from the fourth quarter, but production really did not. Although Petrobras scores pretty well against the likes of Chevron (NYSE:CVX) or Exxon Mobil in the profitability of its upstream business, the difficulties in increasing production are relevant.

At the same time, the refining business is still facing a lot of challenges. Petrobras is one of the least-profitable refiners among the majors, though admittedly this number can bounce around a lot from quarter to quarter and year to year.

Rich Offshore Fields Are a Mixed Blessing
Petrobras has access to some of the largest recent oil discoveries in the world, and that's normally a very good thing for an oil company. Unfortunately, there's a catch. These discoveries are all offshore and largely in deep water, which means more difficulty, expense and complications in accessing that oil.

Petrobras has a long history in offshore ops, and is presently responsible for close to one-fifth of the world's offshore activity. What's more, the company works with other producers like Statoil (NYSE:STO) that have robust experience in offshore/deepwater drilling. Nevertheless, investors need only look at the recent deepwater drilling contracts for companies like Transocean (NYSE:RIG) and Seadrill (NYSE:SDRL) (with rates exceeding $600,000 a day) to appreciate that this activity doesn't come cheap.

At the same time, there are worries about whether Petrobras can meet its production growth schedules. Although Petrobras has tapped companies like Cameron (NYSE:CAM) and National Oilwell (NYSE:NOV) for equipment and services, they are also working with an increasing number of domestic suppliers and the requirements/obligations to do so could put schedules at risk if there are any delays in equipment availability.

SEE: A Primer On Offshore Drilling

Familiar Problems with No Easy Solutions
It's bad enough that Petrobras has to deal with government interference in its operations. What's worse is that Petrobras has all of those problems and the same general operating problems as most other major energy companies. Specifically, Petrobras has struggled to meet long-range production growth forecasts, due in part to increasing rates of decline in its fields. As I said, this is a common problem across the industry, and it's one that is increasingly lowering the expected return on investment for new exploration and production projects.

The Bottom Line
The good news for Petrobras investors is that this company does have privileged access to major oil fields, as well as both solid offshore experience and quality partners. Moreover, as Brazil continues to emerge and mature as a major economy, I expect that the government will see less need to interfere and intervene so directly as with policies like the fuel price controls.

In the meantime, though, it's pretty clear from the stock's valuation that the Street has serious doubts and concerns about the company's ability to meet its own targets and deliver solid returns to investors. It certainly doesn't help that the Brazilian government has made it implicitly clear that shareholders' needs and desires come a distant second to its own.

While this company is arguably not as deeply under-rated as Statoil, there appears to be a lot of skepticism already in place and investors looking for a cheaper (albeit significantly riskier) energy play may want to consider these shares.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: PBR, XOM, BP, RIG, CVX, STO, SDRL, CAM, NOV

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