This international oil producer has been beaten down, but earnings are rising, offering a potential opportunity to buy at a discount.
Petrobras (PBR)
from The Value Bounce
Brazil and Petrobras (PBR) are both deeply out of favor right now. Founded in 1953, this state-owned energy giant is trading at a five-year low. Petrobras’ five-year high was over $50, and the last time it traded at current prices was 2005. The bear story on Petrobras is pretty well known—poor management and high debt.
Here’s a quick rundown of positive trends that are not getting much attention but, taken as a whole, point to great value and significant potential upside.
Petrobras, with $146 billion in annual sales, is trading at half its book value, 55% of sales and at 5.6 times earnings. Importantly, the company is making money with 2013 net earnings coming in at $1.70 per share.
In the first three quarters of 2013, Petrobras sold 2.9 million barrels of oil versus a 2012 average of 2.7 million. Petrobras’ proven reserves in the pre-salt area grew in 2013 to $16.5 billion barrels of oil equivalent—up by 43%.
Any significant new oil or natural gas discovery in the coming year would push the stock upward. The country’s reserve-production ratio stands at an impressive 20 years.
In addition, the company’s fortunes are not tied to Brazil, since it is a global player with operations in 25 countries, including the Gulf of Mexico. The government finally allowed diesel prices to rise 8% and gasoline prices to rise 4% last November. This should boost profitability going forward.
Petrobras plans to invest 9% less in 2014, for a total of R$94.6 billion. Most of it is going to exploration and production of its deep-sea wells.
Many question management credibility on the cost-cutting and debt-reduction front. I think that is overly skeptical. For 2013, exploration costs dropped 26.7%. For the fourth quarter of 2013, refining costs fell 14.5% and oil imports were down 15.6%.
Some very smart money is betting on Petrobras’ resurgence. Ray Dalio of Bridgewater owns 761,800 shares, an increase of 49.55% from the previous quarter. David Dreman owns 347,128 shares, an increase of 11.95% from the previous quarter.
Finally, some technical analysts see up trending support for PBR at current prices. Taking all of these factors into consideration, I recommend Petrobras (PBR) up to a price of $13.50 with a 20% trailing stop loss.
Carl Delfeld, The Value Bounce, www.thevaluebounce.com, 800-250-9657, March 6, 2014