As the state-backed oil producer in Brazil, Petrobras has the unique position of being the leading producer and required partner for developing the nation’s vast offshore bounty. These offshore pre-salt plays — the Campos and Santos Basin — continue to rack up production and reserve gains for PBR.
As of the end of 2013, Petrobras had recorded proven reserves of 13.1 billion barrels of equivalent. That’s an increase of around 1.9% versus 2012’s reserve numbers. The key has been the growth in its ultra-deep water offshore assets. Those wells currently account for about one quarter of PBR’s total reserves and saw a huge 43% increase last year.
On the production side, Petrobras is seeing big results from the pre-salt as well. By mid-January of this year, PBR was producing a record 390,000 barrels per day of oil and natural gas.
With oil prices still eclipsing the $100 per barrel mark, those reserves are worth a lot to the bottom line of PBR stock. And while getting to that oil won’t be cheap — hence the giant capex budget — it’ll be worth it once it the company stars producing more.
Management at PBR estimates that by 2020, the company will be able to produce 4.2 million barrels per day, putting it on par with some of the world’s largest energy stocks.
Another positive is that the Brazilian government recently announced an 8% price hike on diesel fuel and a 4% hike on gasoline. While some analysts have debated the effectiveness of the recent price hikes, it does show that Brazilian government may be willing to play ball with regards to helping Petrobras increase its profits. Overall, it’s a step in the right direction for PBR stock.
Meanwhile, PBR stock is cheap — very cheap.
A Potential Value In PBR Stock
Currently, PBR stock trades for a forward P/E of less than 5. That makes it one of the cheapest large energy stocks on the market. Even venerable energy stocks like Exxon (XOM) still trade at double-digit forward P/E ratios. And while XOM has been adding more oil to its arsenal, it features a similar production and reserve growth profile as PBR. Yet, it almost seems like investors have given up on Petrobras and PBR stock.
That fact that investors continue to flee could be a big buying signal for contrarians.
After all, Petrobras and Brazil have the reserves, and pretty much every oil company wanting to tap them must partner with the state-backed firm. This will almost ensure long-term success for Petrobras stock. And with such a cheap multiple, much of the potential upside outweighs the potential risks involved with PBR stock.
For investors looking to add expansive oil and gas reserves to their portfolio, Petrobras and PBR stock could be the “value” way to do that.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.