The Stock to Buy for $200 Oil

3. The company still has real upside if oil prices rise.

PetroBras reported last week that consolidated net income in the first quarter rose 68% to R$6.9 billion over the same period last year. The cash flow measure EBITDA, a more important indicator of financial health, showed an increase of 26% above the first quarter of 2007.

Oil prices in record territory aren't hurting the company, of course.

Making the situation even more favorable, the costs to produce oil in Brazil aren't increasing much. The relatively stable fixed-cost picture will widen the spread the company earns on each barrel.

But all this upside comes with some downside risk, too.

Caution: These shares are not for the timid.

As the chart at the top of this article shows, owning PBR shares means assuming a higher drawdown risk (the drawdown measures the difference between the peaks and valleys of a stock price).

Since the company reported its oil discoveries in November of last year, the price drawdowns were 45% in November, 50% in January and 55% in March. Things seemed to be getting more unbelievable with each announcement. These round trips each took just a few weeks to complete. Last month, the drop was a mere 20% in a few weeks.

As the reality of the company's earnings power becomes more accepted, this should improve. But PBR is likely to retain its volatile nature for some time, to the delight of long-term options traders.

More conservative investors may choose to invest in ETFs that give them exposure to oil or exposure to Brazil. If you had invested in the Crude Oil Return ETF(OIL), you could have pocketed a 110% return over the last year. Or you could have placed your bet on Brazil and gotten a more modest 70% gain with the iShares MSCI Brazil Index Fund ETF(EWZ).

Investors may now be ready to give PetroBras value for the recent oil and gas findings.

Even if it takes years to see the first drop of this new oil, it doesn't seem safe to bet against an emerging oil giant, with oil hitting record levels around $130 and possibly headed even higher.

>To order reprints of this article, click here: Reprints