Latin America Still Offers Energy Plays

Despite the continent's trend toward nationalization, Brazil's Petrobras and Colombia's Ecopetrol are great buys

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Latin America Still Offers Energy Plays

Peru also has the potential to become a significant producer of hydrocarbons due to its vast untapped reserves. According to the Oil & Gas Journal, Peru had 582 million barrels of proven oil reserves in January 2012. The bulk of these are onshore and can be tapped using advanced drilling methods such as hydraulic fracturing. Those new drilling techniques, along with the opening of South America’s first liquefied natural gas (LNG) export terminal, have enabled Peru to become a natural gas exporter despite rising domestic consumption.

Finally, Uruguay has begun to explore its offshore potential. While the nation doesn’t feature the same pre-salt geography as its neighbor Brazil, officials there are hopeful that Uruguay could harbor its own “elephant find.” The country recently began accepting bids on 15 different blocks offered for exploration.

Portfolio Options

While there are some worrisome situations, the region’s long-term potential for oil and gas is certainly there, and the bulk of the continent’s countries have embraced foreign investment in the energy sector. For investors, the region’s future as a major energy producer is just too good to ignore.

Several publicly traded energy companies, such as OGX Petroleo e Gas Participacoes (OTCBB:OGXPY) are available for purchase. However, the only direct ways to play the region are through Brazilian energy giant Petroleo Brasileiro (NYSE:PBR), known as Petrobras, and Colombia’s Ecopetrol (NYSE:EC).

Pumping out more than 2.7 million barrels of oil equivalent a day, Petrobras is one of the largest energy producers on the planet. However, like the other super-majors, the company has been experiencing dwindling production from its legacy fields. That’s why it has unveiled one of the largest CAPEX plans in history.

Between 2011 and 2015, Petrobras plans to spend a record $224.7 billion on exploration to tap Brazil’s deep-sea oil deposits and more than double production by the end of the decade, to about 6.42 million barrels per day. Already, that spending has trickled down to various service providers, such as FMC Technologies (NYSE:FTI) and Oceaneering International (NYSE:OII).

As I’ve noted before, that sort of higher CAPEX spending is a necessary evil for energy companies and essential to long-term growth. Because of this high spending, now could be a good time to strike on shares of the Petrobras. Since the broader Brazilian market has been flat or down for almost two years, Petrobras has also been on the decline for the same time period. So shares that cost around $42 at the beginning of 2010 now trade for half that, at a forward P-E of just 7.

While Petrobras is the continent’s energy stalwart, Ecopetrol is the fast mover. Responsible for the bulk of Colombia’s energy production, the company has seen its proven net reserves grow by 63% over the last three years. Meanwhile, the company has continually improved earnings on the back of its rising production.

Despite the fact that shares have surged since Ecopetrol’s recent earnings win, the stock can still be had for less than its historical P-E of 16.5. Add the company’s 3.3% dividend yield and you have recipe for Latin American energy success.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/latin-america-still-offers-energy-plays/.

©2014 InvestorPlace Media, LLC

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