Is Latin American Energy Worth the Risk?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the world of emerging-market investments, Latin America is commonly an after-thought. The region has many undeveloped fields, and nations who desperately want energy royalty payments. Without foreign assistance, many nations are simply unable to develop their resources. The continent is complex, but investors who are willing to examine and value the risks can find good deals.
A Quick History Lesson
The culture in Latin countries is very relational and the political system plays a relativity significant role in many aspects of life. Stark income inequalities and periodic bouts of populism affect various nations from time to time. In the late 1980s the idea of the Washington Consensus came about, where many nations implemented market-based reforms. With the fall of the Soviet Union and the failure of some of these reforms, many nations have decided to take a more socialist approach to development and governance.
The Risky Options
Petroleo Brasileiro S.A. (NYSE: PBR) and Brazil are great examples of the Modus Operandi of economic development in Latin America. Over the past couple of quarters, Petrobras has seen a large drag on earnings because the government-determined price for domestic oil products is lower than that of the international price. The company expects these imports to continue over the coming years while it foots the bill.
The company is active off of the west coast of Africa, in the Gulf of Mexico, and in other Latin American nations like Bolivia, Peru, and Argentina. Domestically they continue to expand their deepwater operations and upstream refineries.
Even with their goal of 4.2 million barrels per day by 2016, it is unclear just how much of this production will benefit the bottom line. Their gross margin of 36.1% is a tad higher than Exxon's, but Petrobras's use of their assets is not as effective. Their ROA of 3.3% and ROI 4.1% are both significantly lower than Exxon's numbers. This is the result of being forced to ignore profit in order to satisfy the government. The average investor who does not speak Portuguese or closely follow Brazil's political system will find better investments elsewhere.
YPF S.A. (NYSE: YPF) has been in the news recently when the Argentinian government re-nationalized the company from Spain's Repsol. Repsol was letting production levels fall; thus saddling the nation with an ever increasing trade balance bill. Large dividend payments from YPF to Repsol only increased Argentina's view of Repsol as an expropriating conquistador.
Under their new owners, YPF has increased capital expenditures in their upstream and downstream operations. The firm has successfully increased crude oil production 0.6% in Q3 2012 relative to the year-ago quarter, and refinery throughput rose by 0.3% in the same time period. Given the nation's goal to reduce imports and increase exports, such changes should continue in the future.
Comparatively, YPF's statistics are not very encouraging. There is hope for the future because the company should grow as long as improving operations is in line with national interests. Their ROI of 11.8% and ROA of 5.3% are both higher than Petrobras's. Still, Exxon is run much more effectively with better a better ROI and ROA. Argentina needs more energy. For the time being YPF could prove to be a profitable investment as the government supports the firm's increased capital expenditure and better utilization of assets.
A Safer Bet
Colombia's Ecopetrol SA (NYSE: EC) may not be well known, but it should not be ignored. It has interests in Colombia, the Gulf of Mexico, the Brazilian coast, and in Peru. The firm successfully produces a mix of heavy oil, light oil, and some natural gas. Ecopetrol expects 2015 upstream production to come in around 1000 kboed which is a strong increase from the 720,000 barrels of oil equivalent per day in 2012. Upstream developments are also exciting, with the modernization of their Cartagena plant to boost refining capacity from 80,000 barrels per day to 165,000 barrels per day.
A quick look at the ROI of 23.8% and ROA of 15.2% show that Ecopetrol is run more effectively than YPF or Petrobas. Their gross margin of 22.3% is very strong and helps to explain the strong P/E ratio of 12.3. Colombia as a nation appears to be improving, with 2012 marking its fewest murders in 26 years. Out of all of the companies mentioned here, Ecopetrol appears to be the best investment with a high ROI and growth.
Investing in the emerging markets requires a delicate hand and an astute understanding of risk. Brazil's insistence on using Petrobras to pay for public fuel subsidies is concerning. The Argentinian government can act in a very chaotic manner, but it looks like it will support YPF over the short term in order to reduce energy imports. Colombia's Ecopetrol is the most attractive firm of the three featured here, with strong growth and an improving security situation.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!