Tags: PBR | Petrobras | Petroleo Brasileiro | oil | stocks | investing | energy

Petrobras a Possible Value Play in Oil

By    |   Friday, 27 May 2011 11:05 AM

Brazilian oil giant Petroleo Brasileiro (PBR), commonly known as Petrobras, seems like a stock with everything going in the right direction: The price of oil is high and seems set to rise; the Brazilian economy continues to boom; Petrobras produces oil and gas in Brazil, the majority of which is refined and sold in Brazil, and a strengthening real increases results in U.S. dollar terms.

Yet, through mid-May, the value of the PBR ADRs has declined approximately 10 percent over the last year. In the same period, ExxonMobil (XOM) and Chevron (CVX) share prices have increased by more than 25 percent.

For the first quarter of 2011, Petrobras reported net income increased to R$10.99 billion from R$7.72 billion a year earlier, an increase of 42 percent. Net income per ADR increased to $1.01 for the current quarter from 98 cents in the first quarter of 2010. Heavy share issuance and dilution prevented the per-share results from keeping up with the bottom line net increases. Each ADR is for two shares of Petroleo Brasileiro.

A value play in Brazil

A factor holding back Petrobras is that the company is majority owned by the Brazilian government and more than three-quarters of the company's oil and gas production is consumed in Brazil. For example, in May, the government ordered Petrobras to reduce gasoline prices in an attempt to curb inflation.

From an investment point of view, then, it may be better to view Petrobras as an investment in the Brazilian economy — not a bad thing — rather than as a global energy producer.

Analyst Anisa Redman of HSBC rates PBR as overweight and notes that a strong real reduces the company’s large portion of expenses denominated in dollars, increasing profit margin. The share price lag against other major oil companies may indicate Petrobras is a value stock in the energy sector.

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Brazilian oil giant Petroleo Brasileiro (PBR), commonly known as Petrobras, seems like a stock with everything going in the right direction: The price of oil is high and seems set to rise; the Brazilian economy continues to boom; Petrobras produces oil and gas in Brazil,...
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2011-05-27
Friday, 27 May 2011 11:05 AM
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