Petroleo Brasileiro Petrobras SA (NYSE:PBR) has dived in the last year, with shares falling 36%. Macro conditions in Brazil have not been particularly strong and some investors have begun to worry about political risk attached to the integrated oil, gas, and energy company. In addition, oil prices- while high in historical terms- are not as high as they were some time ago, reducing the potential profitability of drilling in Brazil’s “ultra deepwater” fields. Of course, oil majors in general have not had a particularly good year but even when we look at BP plc (ADR) (NYSE:BP) we see a stronger market performance.
In the fourth quarter of 2012 Petrobras reported a 13% increase in revenue versus a year earlier, with earnings rising 53%. As a result the company narrowly beat Street expectations on the bottom line after two consecutive quarters of large misses. Earnings per share have been quite volatile, so we would not necessarily expect this trend to continue, but it is worth noting. The market capitalization of about $110 billion places Petrobras at 11 times trailing earnings, which is perhaps a bit higher than many of its peers, but higher growth expectations give the stock a forward P/E of only 7 and a five-year PEG ratio of 0.6.
Several weeks after the end of each quarter, hedge funds and other major investors file 13Fs with the SEC to disclose many of their long equity positions. We use this information not only to help develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year) but also to see how top managers have been trading particular stocks. Billionaire Ken Fisher’s Fisher Asset Management sold some of its stake in Petroleo Brasileiro Petrobras SA (NYSE:PBR) last quarter but still reported a position of close to 13 million shares at the end of December (see Fisher’s stock picks). SAC Capital Advisors, managed by billionaire Steve Cohen, increased its holdings to a total of 6.6 million shares (find Cohen’s favorite stocks).
We’ve mentioned BP as a peer for Petroleo Brasileiro Petrobras SA (NYSE:PBR), and we can also compare it to other oil majors including Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), and ConocoPhillips (NYSE:COP). Obviously, none of these companies are as exposed to one particular geography as Petrobras. BP is the cheapest of these four in terms of forward earnings, but even it carries a small premium to Petrobras on that basis. BP has its own issues, of course, but we do think that it looks cheap enough to be worth considering and the dividend yield is quite high. ConocoPhillips is another energy company with a fairly high yield, and it might be a safer pick for income investors who don’t like the idea of buying BP. Its forward P/E is 10, and business seems to have been stable recently.
Chevron’s business is expected to be about flat to slightly down over the next two years, and revenue dipped slightly last quarter compared to the fourth quarter of 2011. It too trades at 10 times forward earnings estimates- a number which is low in absolute terms though of course there is significant commodity risk. Exxon Mobil, the market leader of the industry, saw modest changes on both top and bottom lines in its most recent quarter compared to the same period in the previous year with revenue falling 5% and earnings growing 6%. Its forward earnings multiple is the highest of the group, at 11; it’s possible that it merits a premium to its smaller peers, and note that the gap between it, Chevron, and ConocoPhillips is small.
So we essentially have one cluster of oil majors; then BP, which does have attractive traits from both a value and an income perspective; then Petroleo Brasileiro Petrobras SA (NYSE:PBR), which is expected to encounter high earnings growth in the next several years but has a single-country focus and is particularly sensitive to oil prices in the midst of a boom in drilling in the onshore U.S. While Petrobras does have a higher upside if analyst expectations prove correct, we think that- at least until financial results are more consistent- it might be better to go for a more diversified energy company.
Disclosure: I own no shares of any stocks mentioned in this article.
