Buy into Petroleo Brasileiro Petrobras SA (ADR) (PBR)’s Collapse

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Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has fallen hard. In 2008, the company was the global stock market’s emerging market poster child, a successful private-public venture sitting on the largest oil reserves discovered in the Americas in recent decades.

Over the last two years, the company’s share price has done a slow motion tumble from $50, hitting a new low of $14.60 this week. Investors have dumped the stock as the government maintains low domestic fuel prices and Petrobras’ costs rise across the board. Forbes writer Kenneth Rapoza has staked out the bear stance on Petrobras, questioning CEO Maria Graça Foster’s statements in addition to outlining Petrobras’s recent and future concerns. I take a bull position: Petrobras’s share price collapse makes it one of the most attractively priced oil stocks in the market.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)Background

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is Brazil’s state oil company. With international partners, it develops Brazil’s growing oil reserves, while refining and selling oil and gas throughout the country. The company went public in 2003, but the Brazilian government retains a majority stake. Shares hit $70 right before the financial crisis in 2008, took a fall, and then appeared to recover in 2009, reaching $50 as investors poured money into Brazil’s quick recovery and fast GDP growth.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) sunk with hopes of sustained 7% GDP growth and a series of problems continue to push the share price down. First, Petrobras refines and sells for the domestic market, but the government sets fuel prices, often below market price. Capped fuel prices are great for consumers, but limit profits and – coupled with rising production costs – can cause losses. Second, Petrobras faces rising costs on all fronts: labor costs are rising in Brazil, industrial and fuel exports are on the rise as the Brazilian real loses ground to the dollar, and estimates for Petrobras’ capital expansion projects keep going up. In early February, Petrobras cut its dividend to keep its capital expansion plans on track.

High uncertainty, high rewards

A tumbling share price means that Petrobras is much cheaper than its peers, with a lot of potential upside and little downside left. Petrobras trades at .58 price-to-book. In other words, it trades for almost 50% less than its existing assets are worth – and the company is sitting on some of the largest oil reserves in the Americas.

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