by Aaron Levitt | March 12, 2014 1:26 pm
It may finally be time for investors to grab a PBR. And no I’m not talking about the hipster beer of choice. I’m talking about one of the largest foreign integrated energy stocks — Brazil’s Petrobras (PBR).
After years of disappointment among the world’s largest energy stocks, PBR — along with sister shares PBR.A — have now sunk down to historical lows. A combination of factors have made PBR stock one of the worst-performing emerging market and energy stocks out there.
While the drop due to many of these factors is potentially justified, its most recent drop has given investors an opportunity to score some of the world’s largest oil and gas reserves on the cheap.
And given our continuing thirst for oil and natural gas, they may want to do that before it’s too late.
The story for Petrobras and PBR stock hasn’t been so rosy since the credit crisis. PBR stock — which topped out around $77 before the crisis — has basically sunk like a stone since the bubble popped in 2009. Unfortunately, unlike many other energy stocks, PBR hasn’t returned to its former glory days. In fact it has actually gotten worse. PBR stock currently trades for around $11 per share.
What went wrong? Well, the tale at PBR can be viewed through three lenses.
First, the Brazilian government’s populist politics and price controls on various refined petroleum products have continued to destroy PBR’s bottom line. By only allowing Petrobras to sell gasoline at certain prices, the firm actually losses money on its downstream operations. These controls by the Brazilian government extend in other operations of PBR as well, and the threat of an Argentinian-style YPF (YPF) nationalization — however small — is there.
The second piece to PBR stock and its continue deterioration is that Brazil’s overall economy has been poor. High inflation, lower growth and a stalling currency have all clipped GDP expectations for the B in BRIC. The fact hasn’t exactly done wonders for the total returns of PBR stock.
Finally, and perhaps the most hurtful to Petrobras and its overall position, is the continued overpromise and underperformance in its operations. PBR is perhaps well-known for its monster capex spending programs designed to capture the rich deposits in Brazil’s offshore pre-salt fields. The latest of which calls for spending of roughly $220.6 billion between 2014 and 2018.
In order to pay for such high amounts of exploration, PBR continues to rack-up huge debts in order to tap the challenging reserves.
The mounting expenses include $8.5 billion via a series of new bond issuances. So far this year, Petrobras has issued a total of $13.6 billion worth in various debts, including some floating-rate notes. On the whole, the integrated energy stock’s debt stood at $94 billion before the recent new bond issuances.
While none of the previous issues make a resounding case for buying PBR stock, Petrobras does have a few things going for it. The biggest of which is its vast reserves.
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.
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.
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