If last week's positive earnings announcement is any indication, this Brazilian oil company has a lot more going for it than just good-looking charts (though the charts look good, too.)
PetroBras Returns Continue to Beat Oil and Brazil Investment Benchmarks
PetroBras boasts nearly a $300 billion market capitalization (its market cap just passed that of
In fact, it now claims to be the third-largest publicly traded company in the Americas, behind
With a presence like that, it's clearly a bellwether stock both for the Latin American region and in the oil sector.
PetroBras does a lot: It explores for and produces oil and natural gas. It sells surplus production in Brazil and foreign markets. PetroBras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants and petrochemical units. It is also building new pipelines for ethanol distribution and recently set up a separate operation to manage all its ethanol activities.
Here are three reasons I like PetroBras.
1. The recent oil and gas announcements are real
In the last six months, PetroBras has discovered three super-giant oil fields in Brazil's offshore Santos Basin. The company also confirmed in January a major natural gas and condensate deposit in the Jupiter area.
If estimates of 33 billion barrels in reserve from another field (Carioca-Sugar Loaf) prove correct, then this ranks as the third-largest oil field in the world after Saudi Arabia's Ghawar (66 billion barrels) and Kuwait's Greater Burgan (46 billion barrels).
This potential oil bonanza is in addition to two other new Brazil oil finds, Tupi and Jupiter. These two other fields are estimated to contain about 6 billion to 8 billion barrels each.
With these estimates, Brazil may hold the world's eighth-largest conventional oil reserves.
This is a paradigm-changing event. Some political pundits are already speculating that Brazil may potentially join Venezuela and Ecuador as the third South American member of OPEC.
For PetroBras, it also means that these findings will significantly boost its stated reserves. More reserve assets should translate to a direct increase in the company's share price.
2. PetroBras has the resources to fund these exploration projects
The company's financial and technical resources are being refocused on exploration activities.
For one thing, it's buying more rigs. In March of 2008, PetroBras agreed with
to US$4 billion in contracts for five existing deep-water rigs. The following month, it contracted for three new rigs.
PetroBras also awarded a US$4.1 billion contract to the Norwegian company
, increasing that company's backlog to approximately $12 billion.
In addition, it's reallocating capital to exploration projects. In last week's conference call, management said that the company is postponing or deferring some maintenance and development activities in other areas to focus on exploration.
PetroBras top management is not done spending. These folks have the money to continue at the current rate, but the big question is how much more money will it take to develop the new discoveries. Also, the company has the ability and willingness to take on added debt.
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
. If you had invested in the
Crude Oil Return ETF
, 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
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.
Rudy Martin is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter.