8 Energy Stocks With Upside: Petrobras Leads

NEW YORK (TheStreet) -- The outlook for crude is optimistic with the December 2011 futures contracts touching $100 a barrel on Nov. 24, according to Bloomberg data. A bullish outlook for crude oil augurs well for energy stocks, especially since the sector took a beating after a BP (BP) deepwater oil rig exploded in the Gulf of Mexico -- one of the biggest natural disasters to date. Crude is up 7%-8% this year, although experts foresee prices hitting $100 a barrel next year as spare production capacity shrinks on accelerating demand.

Positive U.S. economic releases, a stable China and India growth rates could support the spike in crude oil prices. However, slower euro zone growth could dampen the uptrend. Nevertheless, the Energy Select Sector SPDR ( XLE) is outperforming the SPDR S&P 500 ETF ( SPY), delivering year-to-date returns of 10% and 7%, respectively.

We have selected eight energy ADRs with potential upsides. These oil companies have strong fundamentals and earning prospects. Companies like Eni ( E) could grab headline news as the government of Italy plans to sell its stake in the company. In contrast, Total ( TOT), Repsol YPF ( REP), Royal Dutch Shell ( RDS.A) and Statoil ( STO) have attractive dividend yields of 4.7%, 5.9%, 5.5% and 4.6%, respectively. Better dividend yields could make long-term investments in these companies productive, especially given the volatile market conditions.

Several companies like BG Group ( BRGYY), OGX Petroleo ( OGXPY) and Petroleo Brasileiro ( PBR) have expansion plans from several exploratory wells in Brazil. This augurs well for these companies as newer capacities would boost their earnings profiles in the long term. China Petroleum & Chemical Corporation ( SNP) expects production from Puguang's main block to continue for more than 20 years. The stocks are stacked by upside, great to greatest.

Statoil ASA (NYSE:STO)

Statoil is an integrated energy company based in Norway with operations across 40 countries.

A 14% increase in liquids prices and an 8% rise in gas prices boosted third-quarter results, compared to the same quarter last year. This has helped the company after a 17% reduction in production during the quarter, in line with management's expectations, largely caused by extensive maintenance activities impacting both oil and gas production. Overall, net income jumped 100% during the quarter, aided by lower tax rates and impairment costs.

The portfolio of new field developments are progressing on track, with production expected by 2012. However, management expects lower production growth in 2011. Analysts suggest that the increase in production during 2012 and higher oil prices will support cash flow generation and distribution of dividends equivalent to about a 50% payout ratio. Earnings before interest and depreciation are expected at 39% and 40% for 2011 and 2012, respectively.

ENI S.p.A. Common Stock (NYSE: E)

Eni SpA is an integrated energy major of Italy with interests in the oil and gas, power and petrochemical sectors.

Industry experts believe that the outlook for the company's gas trading business is bleak over the next couple of quarters. However, Eni would probably rely on the Libyan gas contracts, as it has made an advance payment of nearly $1.3 billion toward supply. Besides, the company is negotiating projects in Kazakhstan, Iraq and Venezuela. Accordingly, capex for 2010 has been increased from around $18 billion to $20 billion.

The Italian government's plan to divest its stake in Eni is another positive trigger. The government is likely to table the divestment plans in parliament during the first half of 2011.

Eni has revised its full-year tax guidance for 2010 from 57% to 55%. Accordingly, analysts upgraded EPS estimates by 3%, aiding in not only favorable tax provisions, but also higher contribution from associates. The stock is trading at 7.7 times its estimated 2011 earnings.

Total S.A. (NYSE: TOT)

Total is a French integrated international oil and gas company operating in more than 130 countries. The company engages in the entire value chain of the petroleum industry, including upstream and downstream operations.

Adjusted net income for the third quarter was up 32%, compared to the same quarter last year. The catalysts for this robust profitability are higher oil and gas prices, the profitability of its new production and improved performance of the chemicals segment.

The company's advances in the upstream include launching the CLOV project in Angola, acquiring stakes in the Fort Hills project in Canada and GLNG in Australia, and three new exploration permits. The group's strategy is to revitalize its exploration program and leverage partnerships to grow upstream by investing in strong value-creating projects.

Repsol YPF S.A. Common Stock (NYSE: REP)

Repsol YPF, Spain's largest integrated oil and gas company, is engaged in the exploration, development and production of crude oil and natural gas, transportation of petroleum products, petroleum refining, production of petrochemicals and marketing of petroleum products.

Repsol reported better-than-expected third-quarter results, with overall profit increasing 32.5%. Exploration and production profit surged 69%, while refining and marketing profits were up 34%.

The company's integrated refining margin is at $5.6 per barrel, which is one of the industry's most competitive.

During October, Repsol signed an alliance with China's Sinopec to launch Latin America's largest private energy groups. Valued at $17.8 billion, the deal reflects Repsol's exploratory activities in Brazil during the last few years. The stock is trading at 11 times its estimated 2011 earnings with analysts overweight on the stock.

OGX Petroleo ADR (Other OTC: OGXPY.PK)

OGX Petroleo is one of Brazil's major oil and gas players with 29 exploratory blocks. Most of the blocks are offshore in the Campos and Santos Basins. During June 2008, the company raised $4 billion through an initial public offering -- the largest amount ever raised in a Brazilian primary IPO.

The company's cash balance looks healthy at $3.3 billion, showing full funding for exploration and production capex, at least until 2013. The rig Pride is set to start drilling a new well in block BM-C-39 in the Campos Basin, apart from the drilling activity in the Campos Basin, and the Parnaiba and Santos Basins.

The offshore exploratory campaign extends across approximately 7,000 square kilometers (sq km), while the onshore activity covers approximately 34,000 sq km, with 21,500 sq km in Brazil and 12,500 sq km in Colombia.

The company's shares are trading at a discount to its peers. On an enterprise value per barrel oil equivalent (boe) basis, the company's shares are trading at $5.8 per boe, while regional peers are trading at $9.5 per boe on average.

Sinopec Shangai Petrochemical (NYSE: SHI )

China Petroleum & Chemical Corporation (Sinopec) is a China-based integrated oil and gas and chemicals company.

As China's largest refiner, Sinopec owns eight refineries. Annual production and transportation capacity from the Puguang Gas Field (PGF), which commenced operations in December 2009, was reported at around 12 billion cubic meters (bcm), and could be a key growth driver over the next three years.

Once the Yuanba block commences production at the end of 2011 or early 2012, total capacity is pegged at 15 bcm per year. The company expects production from Puguang's main block to continue for more than 20 years. Analysts expect PGF to contribute about 5%-10% toward overall profit by 2012.

Other triggers include upstream asset injections from the parent company, appreciation of the Renminbi, and changes to the refined products' pricing mechanism. The stock is trading at around 9 times its estimated 2010 earnings, at a 30% discount to its closest peers.


BG Group is a U.K.-based company engaged in the exploration, development, production, transmission, distribution and supply of natural gas and oil, with interests in power.

Better-than-expected third-quarter results and positive company guidance impressed analysts, and the 2010 EPS forecasts have been raised by 2%. The stock is trading at 13 times its estimated 2011 earnings.

The company is forging partnerships for future production supplies. New discoveries in the Santos Basin, in partnership with oil giant Petrobas, is a part of the company's expansion strategy. In the quarterly update for September, the Santos Basin's gross recoverable resources were up 34%, or 2.7 billion barrels of oil equivalent (BOE), to 10.8 BOE.

An exploration opportunity is likely to originate from Australia. The company is investing about $15 billion in the Curtis Liquefied Natural Gas project. The Queensland state-based project will start fuel shipments in 2014.

Petroleo Brasileiro S.A. (NYSE: PBR)

Petroleo Brasileiro, or Petrobras, is an integrated Brazilian oil and gas company operating in segments like exploration and production, refining, transportation, and marketing of gas and power.

For the third quarter, earnings before interest tax and depreciation stood at $8.4 billion, beating analysts' estimates of $8 billion came from better refining margins.

Exploration and production capex stood at $8.8 billion, a two-fold increase from the second quarter. Most of the investments were utilized for pre-salt projects. Overall, experts peg 2011 capex at around $30 billion-$35 billion.

The company prefers to employ Honeywell technology for hydro-cracking and hydro-treating at premium projects with a combined capacity of 900 kilo barrels per day. The company's earnings are highly correlated with crude oil prices; analysts suggest incremental EBITDA of $500 million and earnings of $300 million for every $1 per barrel rise in reference oil prices. The stock is trading at 9.5 times its estimated 2011 earnings.

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