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

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)The Brazilian equity market has been among the worst performers globally, with the index down by 17% in the past two months. Nowadays, the market is near 2008 trough levels, economic growth is weak and inflation is going up. In that context, the oil & gas sector has been one of the worst performers. Here, I will try to answer the following question: are share prices low enough to justify a contrarian investment, or should you sell whatever you have left and run? Let’s take a look at three interesting Brazilian oil & gas stocks and find out.

The off-shore king

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is about to go through a production turn-around that could make production grow up to 8% per year until 2016. Financially, the company’s first quarter should have been the worst quarter of the year. Price increases, higher ethanol mix in the gasoline and ever-increasing downstream performance should help the company’s results from the second quarter onwards. Besides, partnerships for the new refineries in Northeast Brazil are also positives that shall ameliorate Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s returns profile. All these developments make me think that, trading at 52% book value, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s shares are fairly valued.
That said, there also are meaningful threats for the company’s future profits. The one threat that worries me the most is the Real’s continued depreciation against the US dollar. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) imports a considerable amount of fuels and the government, for political reasons, might not allow the company to increase prices further. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) trades at 6.5 times P/E and I would start looking at the stock in order to build a position at a level of $13 per ADR.

Strangely cheap

Braskem SA (ADR) (NYSE:BAK), trading at 5.1 times EV/EBITDA and 8.5 times P/E, looks cheap. The reason? The company has 100% of its revenues, 80% of its costs and 70% of its debt denominated in US dollars. This means that the Real’s depreciation ameliorates the company’s balance sheet (through debt) and income statements (through costs). Other stocks with similar currency leverage such as Fibria or Suzano (both pulp and paper companies) are up 19% and 13% in the past month, respectively. Meanwhile, Braskem SA (ADR) (NYSE:BAK) is up by just 6.8% in the last four weeks and 12.8% year-to-date.
Braskem SA (ADR) (NYSE:BAK)’s high currency leverage, high international spreads and raw material tax incentives make it a good buy at the current price level. That said, results from all the aforementioned factors will only appear in the third quarter.

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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