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Cheapest Stock in the Hottest Emerging Market

The Russian market is leaving the rest of the BRICs in the dust

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There is another smaller convertible overhang in 2011, which may or may not be a big deal depending on oil prices. In December 2010, Lukoil issued $1.5 billion 2.625% senior unsecured convertible bonds due June 2015. The bonds are convertible into ADRs listed on the London Stock Exchange. The bonds were issued at par and will mature after four-and-a-half years past their issue date with the conversion price set at $73.71 per ADR.

Bond holders will be able to convert their bonds into ADRs at any point from 40 days after the issue date to the sixth dealing day prior to the final maturity date, while Lukoil will have the right to redeem the bonds at any time after Dec. 31, 2013. It seems to me that management saw that their stock was depressed due to the COP sales in 2010, so they decided to pay a cheap interest rate on the convertible bonds — essentially turning this into a delayed secondary offering of shares considering that the conversion price is very close to the present price right now (not the case at time of issuance). By the way the stock is trading, it does not look like this $1.5 billion of soon-to-be secondary offering of shares is bothering investors.

A Bonus Brazilian Oil Play

Another stock that needs to play catch-up in 2011 is Petrobras (NYSE: PBR). Brazil is similar to Russia in its reliance on natural resources, but it is a better balanced economy considering the extreme leverage that Russia has to oil and metals’ prices.

The Brazilian oil giant also underperformed massively due to share sales and financing arrangements it had to make in 2010 in order to develop its deep-sea oil finds. The whole $224 billion financing has not been completed yet, but I don’t think that shares will wait to start moving.

Anyone telling you that they have a reasonably exact idea of how much it would cost PBR to extract the deep-sea oil is probably lying. The only thing you can say is that the higher the oil price goes, the better for Petrobras. I think this current $100 oil price will be the perfect catalyst for the stock to get it moving in the right direction. Valuation metrics for Petrobras are a mess without the completed financing, as you cannot be sure about the ratio of equity to debt outstanding. The only thing you can be sure of: PBR management loves a triple-digit oil price.

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