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Petroleo Brasileiro Petrobras SA (ADR) (PBR), Braskem SA (ADR) (BAK) – Brazilian Oil: Roadmap Into 2014

An option on probable huge value

HRT Participacoes em Petroleo SA is a high-risk high-reward pure-play exploration thesis. Since the IPO in 2010, most analysts solely focused on the potential high rewards. As I always say “happiness equals reality minus expectations.” Since expectations were too high, in US dollar terms, the stock is down by almost 80% since 2012 began. The downside risk was huge and, indeed, 12 consecutive wells failed to prove the company’s geological thesis.
Now, I think the argument should be reversed, as the risk for equity investors is lower thanks to a depressed share price that is close to the company’s net cash by year end, offering limited downside in a bad exploratory scenario. Besides, this year is a busy one for HRT on a number of fronts: Namibian exploration, Solimoes gas monetization, money from TNK-BP milestone payments, probable more farm-outs and divestments and cash-flows from the Polvo project.

Only for the third time in its history, HRT is trading below its cash balances. I would recommend to go long, if you can bear the risks of holding a company with these characteristics (it produces net losses and is expected to do so until 2015).

Foolish bottom line

The three companies named above operate in the same sector and in the same country, but they are all extremely different. While Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is ameliorating fast from an operational standpoint and owns huge off-shore reserves, the company is controlled by the government. Governments don’t always have the same objectives as private shareholders. Braskem SA (ADR) (NYSE:BAK) is the only company that looks cheap and ready to benefit from a depreciating local currency. On the other hand, HRT is a very cheap option with a market capitalization equal to the company’s net cash.

The article Brazilian Oil: Roadmap Into 2014 originally appeared on and is written by Federico Zaldua.

Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro (NYSE:PBR) S.A. (ADR). Federico is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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