Petroleo Brasileiro Petrobras SA (ADR) (PBR): A Profitable Long Term Investment

One of the largest and well known Brazilian companies, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is on the verge of a turnaround. If you are thinking about owning the stock, now is the time. It is trading at a low P/E ratio and looks quite cheap. The oil behemoth has a lot of potential despite some hiccups like high debt and refinery losses. Out of all the energy stocks, I believe Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is the most attractive and profitable one at this moment, especially for long term investors. In this article I shall discuss why.

Better Q4 profit and falling debt

Petrobras is a Brazil based holding company which engages in the exploration, production, refining and sale of crude oil and other energy sources. It reported a fourth-quarter net of 7.75 billion Brazilian Reals or $3.89 billion, which is a jump of 53% from the year-ago quarter. The profit was above estimates and mainly due to the sale of government bonds issued by the company offsetting the losses in the refining division. Total debt stands at around $96 billion, 4 times its 2008 level, which exposes the company to a possible rating downgrade. However, the company is planning to sell some assets of around $10 billion by 2017 which will generate some cash, thus reducing debt.

Why Petrobras faced losses in its refinery division

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) had the potential to become Brazil’s net exporter of oil. It witnessed a strong demand of fuel which it imports at world prices and sells below cost. This was because the prices are highly subsidized by the Brazilian government which led to huge losses in its refinery division. The losses occurred in spite of the significant revenue it accumulated by the increase in domestic gasoline and diesel prices. Petrobras fell short of domestic crude oil production because of lower recovery rates, as well as maintenance shutdowns at aging platforms.

Huge investments lining up

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) plans to continue expanding its domestic refining and distribution operations. According to CEO Maria das Gracas Foster, Petrobras expects to start crude oil production at its Cidade de Paraty FPSO at the new deep-water Lula Nordeste field in Brazil’s offshore subsalt in May. Also, the company reportedly is in partnership talks with Eike’s Batista’s LLX Logistica that could lead to signing up for a berth in the Acu Port project. Production from the Lula Nordeste field would yield 300,000 barrels.

In addition to this, 6 new platforms will enter production in 2013, and the output from them is expected to increase in the second half of this year. It is set to reach 1 million barrels a day by 2017. Petrobras also has plans to double Brazil’s natural gas supply by 2020. The domestic demand for fuels in Brazil are set to grow at an average 4% every year which will help Petrobras in meeting its revenue targets.

Competitors

Petrobras is the biggest government owned oil company in Brazil and faces little competition in its home country. This is due to the preferential treatment given to it by the Brazilian government. However, there remain competitors like ConocoPhillips (NYSE:COP) and TOTAL S.A. (ADR) (NYSE:TOT).