Petrobras’ performance has also suffered because of the ongoing interference of its majority owner the Brazilian government, with local content rules and regulatory interference affecting the company’s ability to effectively implement projects. However, Petrobras has massive proven reserves of almost 13 billion barrels of oil and exclusive operating rights in Brazil with legislation making Petrobras a partner in any projects initiated by other companies operating in the country.
How cheap is Petrobras in comparison to its peers?
Despite all of these positive catalysts indicating that Petrobras has the potential to meet its ambitious production targets, the key question for investors is just how cheap is the company, particularly in comparison to its peers? The peers I have chosen to compare Petrobras to are Chevron Corporation (NYSE:CVX) given its considerable Latin America operations, meaning it shares many of the same economic and political risks as Petrobras. The other is Exxon Mobil Corporation (NYSE:XOM) the ´king of oil´ which has been one of the strongest and most consistent performers in the industry and a favorite among investors. Like Petrobras, both of these companies also have considerable proven reserves, with Chevron’s 11 billion barrels of oil and Exxon’s 25 billion barrels.
As the table below illustrates, Petrobras’ valuation metrics compare favorably to its major integrated oil and gas peers. It has a particularly low enterprise value to proven reserves ratio of 14, which is lower than Chevron’s ratio of 21 or Exxon’s 16.
Source data: Petrobras, Chevron and Exxon Financial Filings, Yahoo! Finance and Market Watch
Petrobras valuation also appears appealing on a price per flowing barrel basis at $77,000 per barrel of oil and with a price to operating cash flow ratio of 7. Its enterprise value to EBITDA ratio at 7 is not particularly cheap, but I expect that to improve as production increases, leading to higher sales and costs falling further.
In addition, Chevron and Exxon are global oil majors with geographically diverse operations that are subject to a wide range of geo-political risks that change frequently, whereas Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s risks are confined predominantly to its Brazilian operations. While these risks at this time are high, given the degree of government intervention, they are at least readily recognizable and quantifiable.
Petrobras also has preferential access to Brazil’s oil reserves, which are believed to be the fifth largest in the world, giving the company substantial development potential to grow its proven reserves. It is also clear that from Chevron and Transocean LTD (NYSE:RIG)’s experience in Brazil that the government will continually seek to protect Petrobras’ preferential possession.
Bottom line
Despite the many problems that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has faced over the last two years, particularly with declining production on the back of Brazilian government interference in the company, it now appears cheap on its valuation metrics. This makes Petrobras a compelling play for investors on its proven reserves and long-term development prospects.
Matt Smith has no position in any stocks mentioned. The Motley Fool recommends Chevron and Petroleo Brasileiro (NYSE:PBR) S.A. (ADR).
The article Despite Its Many Problems, Petrobras Represents Value For Investors originally appeared on Fool.com.
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