Why Petroleo Brasileiro (PBR) is Good for Investment?

                                                    

Though Petroleo Brasileiro’s performance is subject to Brazilian politics (as the Government holds 54% shares) and other problems, it is now an investment friendly stock. Other problems include declining crude oil price, “slow down in china” and the challenges of reaching ultra-deep water off the coast. Its share price is falling for the last 2 years starting from $42 in 2010 to $19.32 at the end of June, 2012. So now, it’s P/E ratio reaches  7.02 which is far below than the sector P/E ratio. Currently it’s trading at $19.82. It shows a little upward trend in price. The relative strength index (RSI) has also been rising throughout the last week. On 10th of this month, the RSI was 38.2 and on 16^th, the RSI reached  52.92 which indicates that it is recovering from the oversold state gradually. So, I guess, it is high time the investors should think about the investment prospect in Petroleo Brasileiro before it reaches  the overbought state.

Company Overview

Before I discuss the basic ratios and company financials, it is necessary to provide a company overview here. Petroleo Brasileiro (NYSE stock symbol PBR) was founded in 1953 with its headquarters in Rio de Janeiro, Brazil. Since then, it is doing a very smooth, profitable business in oil and gas industry. Today, it places itself in the top position in Latin America in terms of revenues. In 2011, the revenue was US$ 145.9 billion and the total asset was measured at US$ 319.4 billion. By market capitalization, Petroleo Brasileiro is the largest company in the southern hemisphere. With its subsidiaries, Petroleo Brasileiro explores, exploits and produces oil, gas and energy in Brazil and other foreign countries. This company controls substantial oil and energy resources in 20 countries in South America, North America, Africa, Asia and Europe. It produces more than 2.7 million barrels of oil equivalent per day and currently contemplates on doubling its production capacity. Its current profit margin is 14% with a BBB debt credit rating. This company was listed in New York Stock Exchange (NYSE) in the year 2000 and now it is one of the top traded companies in NYSE in terms of volume sold.

PBR’s recent performance

The 52 weeks’ price and volume graph of Petroleo Brasileiro is pasted here. 52 weeks’ highest is $ 35.10 and the lowest is $17.27. The highest was in last year’s August. We see a sharp decline after the highest was created and continued falling till the end of September. From the very starting of October, the stock price started to rise again and created the second high in the first week of February of this year. Since then, it’s price kept falling till the start of this month. From the first week of this month, it started to rise again and has created the first hat (^). During the second week it declined a bit and started rising again in the third week and it is probably going to make a second hat (^) above the earlier one. According to the experts, it is a strong positive sign that often triggers an upswing.

The most important factor about this company is that it has discovered many oil and gas fields since 2007 in shores of Brazil. It is contemplating on investing more than $200 billion immediately in offshore projects to increase production and support the rising demand of energy in Brazil and other countries.

Brazilian Economy

It is possible that this time also the stock price will fail to rise. But I believe this stock will never fail you in the long term mainly because of the growing economy of Brazil. Brazilian central bank has decided to reduce the interest rate by 0.5%. Now the rate is the record low of 8%. This is only to boost up investment and production. One thing the investors should always keep in mind – Brazil is in the BRIC. So, as a growing economy, its politicians are always concerned with investment friendly policies. Tax reductions are very likely to take place in years to come in order to multiply production. Brazil’s concern about increasing production will increase the demand of oil, gas and other energy too. That’s where Petroleo Brasileiro’s business prospect lies.

Basic Ratios

While reviewing the financial statements of the company, you can easily identify that the share price of the company is going to step up. The company’s strength is reflected in multiple areas- revenue growth, inflating profit margin and attractive valuation level. For almost two years, the stock price is in a decline phase, but as a fast growing company from the BRIC group, this is not going to continue forever. The trailing EPS is 2.86, which indicates a stalwart position of the company. The PE ratio of 7.02 is apparently lower the than the industry. The EPS growth rate is negative right now because of the world wide recession and hence the PEG is 1.32; but the global recovery is likely to help it. Moreover, an estimate shows that the demand of oil from China, India and South America is going to increase in the next decade which will definitely change the scenario.

The debt equity ratio is 48.44% which is quite normal. The price to book value and price to sales ratio are 0.40 and 0.49 respectively, which refers to an undervalued position of the stock. Profit margin is 13.93% and operating margin TTM is 17.62%. Beta for the stock is 1.58 which is reasonable.  All these ratios make the stock a good takeover target for long-term.

Financials

Revenue of the first quarter for this year is $37.41B which is approximately 5B higher than the same quarter in the last year. Revenue growth has outpaced the industry average. However, the revenue did not drip down to the bottom as there is a 20% decrease in the net income compared to the same quarter one year ago. PBR’s current return on equity has declined a little from the same quarter one year ago. This implies a slight weakness in the business. In comparison to the overall market and other companies in the Oil & Gas industry, PBR's return on equity is notably less than that of the industry average. The quarterly EPS is 0.80 and the cash reserve is 21.90B.

Summary

Under various macro-economic uncertainties like federal election, china’s slowdown, the European recession, potential tax hikes in 2013 budget and the like, PBR still poses a high growth potential and a long term play. The stock had been stagnant during the first half of the year because of past capital crisis and a weak Brazilian dollar. But the hangover has kept its price lower and I think it is a great long-term investment opportunity as PBR continues to be undervalued than its peers. 

Right now, PBR may seem an inconvenient instrument to invest in, but I think the timing is really good. PBR has got support of the Brazilian government which has put in over $30 billion, and the Chinese investors who have promised over $20 billion to PBR’s oil exploration. Other long-term accelerators contain the approaching 2014 FIFA World Cup as well as the 2016 Olympics. These events are likely to improve Brazil’s economy, and be a gain for its companies, particularly for PBR on the backdrop of a potential oil price hike.

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