When thinking of emerging market investments, Brazilian oil giant Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) frequently comes to mind. With a $67 billion market cap, exciting deepwater prospects off the Brazilian coast, a PE of around 12 and a 6.6% dividend, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) at first blush seems like an ideal investment.
Unfortunately, the Brazilian government owns a controlling stake and government interests don’t always align with those of foreign investors. Production is down for both oil and natural gas, which helps explain why the stock currently trades near its three-year lows. Turns out, there are other emerging market companies besides Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) worth a look, let’s look at three.
An even bigger South American oil company
Ecopetrol S.A. (ADR) (NYSE:EC) of Colombia offers investors another government-controlled oil company. With a $90 billion market cap and 6.5% dividend, Ecopetrol S.A. (ADR) (NYSE:EC) rivals Petrobras in size and yield. Last quarter production increased but earnings declined due to lower oil prices. This latest earnings report continues a trend of lower than expected earnings over successive quarters. The declining earnings are not for lack of trying. Ecopetrol S.A. (ADR) (NYSE:EC) will spend money upgrading its refineries and pipelines and plans on expanding its exploration activities in the Gulf of Mexico.
Ecopetrol faces significant obstacles. On the business side, oil prices continue to slowly decline, further pressuring earnings. Of late, Ecopetrol has made no major oil discoveries and its price per proven reserves makes the company more expensive than ExxonMobil or Petrobras. On the political side, the Colombian terrorist organization FARC (Revolutionary Armed Forces of Colombia) and the Colombian government talk peace in Havana. However in Colombia, Ecopetrol S.A. (ADR) (NYSE:EC) experiences problems with FARC blowing up its pipelines.
All of these headaches have pushed the price of Ecopetrol S.A. (ADR) (NYSE:EC) from around $63 to $43 in three months. Minister of Finance Mauricio Cardenas recommends the stock, but what else can he say? I say avoid this company until the stock hits a floor or FARC grows up and leaves Ecopetrol alone.
LATAM Airlines Group SA (ADR) (NYSE:LFL), the merger of LAN airlines of Chile and TAM airlines of Brazil last summer, offers domestic and international passenger air travel from South America to domestic and international destinations. Through subsidiaries, LATAM Airlines Group SA (ADR) (NYSE:LFL) offers airfreight services from Mexico, Brazil and Colombia to 27 different countries. In terms of revenue, passenger traffic generates the lion’s share of the company’s income.
The latest quarter saw increases in operating income, passenger traffic from both Brazil and Spanish-speaking countries. Total revenues increased 1.5% and synergies of the merger continue to unfold. Looking ahead to the World Cup in 2014 and the Summer Olympics in 2016, LATAM Airlines Group SA (ADR) (NYSE:LFL) should do well. Unfortunately, earnings declined by about 50% and that overshadowed the good news.