Crude has lost $9 a barrel since the beginning of the month, mainly because of disappointing reports highlighting slower growth in China and still-sluggish growth in the U.S. and elsewhere, while oil supplies remained high. At the same time, investors sold off gold, silver and other commodities, and looked to the stock market for better returns. Last week, the stock market had a volatile week as many investors traded shares looking to consolidate their positions. Looking at three Latin American oil companies, we can see that fundamentals added a special reason for this volatility.
It hasn’t been easy for YPF SA (ADR) (NYSE:YPF). The company crashed precipitously in value following the Argentine government’s decision to expropriate 51% of the company from Repsol SA (ADR) (OTCMKTS:REPYY) in April 2012. After a more than 4% drop last week, YPF SA (ADR) (NYSE:YPF)’s P/B ratio stands at 1.4, and, considering 2012 EPS of $32.9, the 2012 P/E is 11.4.
The company is in serious need of investment to help develop the country’s 7.4 million acre Vaca Muerta shale field, which may hold one of the world’s biggest unconventional energy resources. YPF SA (ADR) (NYSE:YPF), as well as
One of the main YPF refineries went offline following a fire during floods in the La Plata province a few weeks ago. YPF SA (ADR) (NYSE:YPF) plans to build a new coke unit to replace the damaged one, requiring an 800 million peso ($154 million) investment. In addition, in a press conference CEO Galuccio admitted that the company may have to increase imports from 10% to 15% in order to reach domestic supply demands. Last week the company announced that it would start exporting crude oil for the first time since January 2008.
Because of the size of YPF’s funding needs, last week Argentina created a fund of up to $2 billion to help develop the Vaca Muerta shale field. In addition, YPF expects to raise about 3 billion pesos from a debt issue due this week.
Another Latin American oil company with enormous energy resources is Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), known as Petrobras. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is the second largest company in terms of market cap in the Brazilian stock exchange.
Similar to YPF SA (ADR) (NYSE:YPF), Petrobras is a parastatal company whose main shareholder is the Brazilian government. As a result, Petrobras may not always maximize private shareholder equity. For years, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has been forced by the government to sell fuel domestically at a loss. The government has a tight inflation policy and uses Petrobras to keep fuel prices down and inflation in check.
Heavy government intervention means that Petrobras has an attractive valuation. The P/B ratio stands at 0.6, meaning that the stock is trading well below its book value. Considering 2012 EPS of $0.85, the 2012 P/E is 9.7. Forward December 2013 P/E is 7, based on a consensus estimate analysis. On a P/B and P/E basis, valuation is very attractive, and Petrobras is cheap. If the company beats EPS expectations, there could be an important upside.
is a Colombia-based petroleum company focused on identifying opportunities primarily within the eastern Llanos Basin of Colombia, as well as in other areas in Colombia and northern Peru. Ecopetrol S.A. (ADR) (NYSE:EC) has 163 production fields, and production is concentrated in the upper, middle and lower Magdalena, the Eastern Plains and the Caribbean, and the provinces of Putumayo, Cesar and Norte de Santander.
Unlike the two previous stocks, this one is on the short side. Its P/B ratio stands at 2.5, above the industry average of 2.3. Considering 2012 EPS of $4.08, the 2012 P/E is 11.6, but the forward P/E is 4.04, based on a consensus estimate analysis.
Ecopetrol S.A. (ADR) (NYSE:EC) closed Friday’s trading session at $47.25. In the past year, the stock has hit a 52-week low of $45.89 and 52-week high of $67.92. Ecopetrol stock has been showing support around $46.06 and resistance in the $47.94 range. Technical indicators for the stock are also bearish.
Bottom line
These three oil companies have great potential for growth. Of the three, Petrobras is the best positioned to exploit its resources. If this coming first quarter report comes with a positive surprise it could mean a turning point. YPF SA (ADR) (NYSE:YPF) is in need of great funding to exploit the Vaca Muerta fields, and Argentina’s history of default makes it very difficult to attract investors and also very expensive. In the case of Ecopetrol, fundamentals don’t support a buy recommendation.
The article Latin America’s Oil Industry: A Review originally appeared on Fool.com is written by Damian Illia.
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