Jim Chanos spoke with Bloomberg Television anchor Stephanie Ruhle from the Robin Hood Investor’s Conference in New York today. Chanos described Petrobras as a “scheme,” saying that optimism it will benefit if Dilma Rousseff is voted out of office is unfounded: “Every time Dilma’s poll numbers go up, Petrobras’s stock goes down…Even if Neves wins, it doesn’t change the economics” at Petrobras.

Jim Chanos Says Petrobras is a 'Scheme, Not a Stock' [FULL TRANSCRIPT]

Petrobras Optimism on Election Unfounded, Jim Chanos Says

STEPHANIE RUHLE, BLOOMBERG: Jim, we will get to talk about China, but you just left the stage. You have been followed out here by attendees talking about your big idea, Petrobras. Talk to us.

JIM CHANOS, FOUNDER, KYNIKOS ASSOCIATES: Well, I guess we’re going to talk about one emerging market situation first. I gave a presentation inside to the Robin Hood folks on an idea we’ve been involved with on and off for the last couple years, but it was timely because of the upcoming election. This Sunday the presidential election in Brazil is occurring, and Brazilian stocks have basically been – been ping pong balls moving every which way based on where people think the presidential election will fall out.

Our point was Petrobras is such a unique animal globally and it’s an energy stock that it defies that kind of simple analysis. And we pointed that out —

RUHLE: Why? It is so tied to Dilma Rousseff.

JIM CHANOS: Well it is, and that’s the interesting thing. Every time Dilma’s poll numbers go up, Petrobras stock goes down. And every time Neves’s numbers go up, Petrobras stock goes up. The problem is it’s tied to Dilma. She was the chairwoman of this company. There’s been a number of investigations and – and scandals swirling the company – around the company. And we’re just not sure that even if Neves wins he’s going to really be feeling all warm and fuzzy toward this creature. Having said all that, the economics are just so poor at Petrobras that we really have called it a scheme, not a stock.

RUHLE: A scheme. Do you believe they misled investors back in 2010 when they did the IPO?

JIM CHANOS: Well we did – there was a slide in our presentation where we looked at the company’s projections. They keep – these five-year plans that they keep revising. And suffice it to say that if you look at it on the table, they have been a tad too optimistic down through the years by a lot.

RUHLE: But is that enough to call it a scheme?

JIM CHANOS: Well, no. The problem is is that in fact the company is cash flowing about $25 billion, $26 billion, so-called EBITDA, and its CapEx annually is $45 billion, and another $5 billion of capitalized interest. So their – their gross cash flow is only covering half of their capital spending and capitalized interest, so they’re not covering their dividend. And in fact they’re having to borrow the shortfall, and they’re borrowing more than $20 billion a year. This is an enormous, enormous sink hole from a financial point of view.

RUHLE: So their expectation to double output by 2020 for you, laughable.

JIM CHANOS: Well they can double output by 2020. For the last handful of years, five years, production really hasn’t increased. And we put a chart up to show the Robin Hood folk. Despite this enormous capital expenditures and the fact that their big pre-salt (ph) field is now coming online, production hasn’t increased. And that’s disturbing.

Now maybe it will double in the next six years, but we would argue it has to double to basically service all this new debt that they’re taking on and will take on to complete the field. And in the oil and gas business, particularly in Brazil, as you know, sometimes things don’t always turn out the way you think they’re going to turn out. I think we can look at the Batista saga and others that – to really point out to you there are enormous risks here.

RUHLE: Batista saga, way too tied to the government. So are you saying this is just like that? Because many people think if Neves wins the stock will rally.

JIM CHANOS: Well that’s in fact what I think will be the opportunity. And that’s why I thought it was timely this week that if that’s what happens and if investors knee jerk run into the Bovespa and buy Petrobras because Neves wins, I think it’s a great entry point on the short side in this story because it doesn’t change the economies of the situation. And we pointed out today in our presentation that even – even if you gave this company Exxon’s margins both upstream – and I see your eyebrows – and downstream, it would still be break even cash flow.

RUHLE: Really?

JIM CHANOS: Yes.

RUHLE: So those of us who are saying, well, if Neves wins who’s going to be in Petrobras management, you’re laughing at that. You’re saying –

JIM CHANOS: My conclusion was – my conclusion is if Neves wins, this is underwater. If Dilma wins, this is really underwater.

RUHLE: You’re damned, you’re damned Petrobras.

JIM CHANOS: I think it’s just a matter of degrees.

RUHLE: All right. Let’s go to the other side of the world, China. We get GDP numbers tonight. People are focused. What are they going to be? Are you saying numbers shnumbers because they’re all made up?

JIM CHANOS: Well I’ve often said that China is the only advanced country in the world that knows its annual GDP on January 1 of that year. It’s true.

RUHLE: So will you even look at that number?

JIM CHANOS: We’ll look at it of course, but – but remember, everything is managed to the number. It’s sort of like the high-tech industry in 2000. You can’t miss the number. And so I’m sure it will be 7 something, close to 7.5, give or take, and – and I think you really shouldn’t get too excited one way or the other because with China it’s all about actually how they get there and how much credit and debt are they taking on to do it.

And I think it’s now sort of almost beyond a shadow of a doubt that in fact most observers think that the economic model needs reworking. And whether or not they can reform is another question.

RUHLE: All right. Let’s talk about gloating for a moment. In 2010, you signed a letter to the Fed warning about the risks of QE. When you look at the market turmoil, the disastrous week many hedge fund managers, peers of your hands, are your hands on your hips and you’re saying how you like me now, I told you so?

JIM CHANOS: No, no. Gosh no. It’s a little funny. You mentioned that letter –

RUHLE: Because I’d like to see you do that.

JIM CHANOS: The – you’re going to wait a long time. The – the – that letter has

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