Petroleo Brasileiro Petrobras SA (PBR): Is Latin American Energy Worth the Risk?

Page 1 of 2

In the world of emerging-market investments, Latin America is commonly an after-thought. The region has many undeveloped fields, and nations who desperately want energy royalty payments. Without foreign assistance, many nations are simply unable to develop their resources. The continent is complex, but investors who are willing to examine and value the risks can find good deals.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)A Quick History Lesson

The culture in Latin countries is very relational and the political system plays a relativity significant role in many aspects of life. Stark income inequalities and periodic bouts of populism affect various nations from time to time. In the late 1980s the idea of the Washington Consensus came about, where many nations implemented market-based reforms. With the fall of the Soviet Union and the failure of some of these reforms, many nations have decided to take a more socialist approach to development and governance.



PBR data by YCharts

The Risky Options

Brazil

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) and Brazil are great examples of the Modus Operandi of economic development in Latin America. Over the past couple of quarters, Petrobras has seen a large drag on earnings because the government-determined price for domestic oil products is lower than that of the international price. The company expects these imports to continue over the coming years while it foots the bill.

The company is active off of the west coast of Africa, in the Gulf of Mexico, and in other Latin American nations like Bolivia, Peru, and Argentina. Domestically they continue to expand their deepwater operations and upstream refineries.

Even with their goal of 4.2 million barrels per day by 2016, it is unclear just how much of this production will benefit the bottom line. Their gross margin of 36.1% is a tad higher than Exxon’s, but Petrobras’s use of their assets is not as effective. Their ROA of 3.3% and ROI 4.1% are both significantly lower than Exxon’s numbers. This is the result of being forced to ignore profit in order to satisfy the government. The average investor who does not speak Portuguese or closely follow Brazil’s political system will find better investments elsewhere.

Argentina

YPF SA (ADR) (NYSE:YPF) has been in the news recently when the Argentinian government re-nationalized the company from Spain’s Repsol. Repsol was letting production levels fall; thus saddling the nation with an ever increasing trade balance bill. Large dividend payments from YPF to Repsol only increased Argentina’s view of Repsol as an expropriating conquistador.

Under their new owners, YPF has increased capital expenditures in their upstream and downstream operations. The firm has successfully increased crude oil production 0.6% in Q3 2012 relative to the year-ago quarter, and refinery throughput rose by 0.3% in the same time period. Given the nation’s goal to reduce imports and increase exports, such changes should continue in the future.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

The 50 Best Personal Finance Blogs

Most Expensive Apartments in New York City

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!