If You Want Oil, Head South
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BP's 2013 Statistical Review of World Energy comes with a treasure trove of information. One the most informative pages looks at the world's changing reserve to production ratio. Oil companies find oil, then extract it, refine it and sell it. If companies cannot replace their reserves, then their way of life is over. Over the past ten years, regions like South America and Africa have been some of the few places where the reserve to production ratio has increased.
The majority of South America's reserve growth in the past decade has come from Venezuela's heavy oil fields. This is a challenge for U.S. energy companies, as the Venezuelan government nationalized the oil sector and seized a number of assets. ExxonMobil (NYSE: XOM) had operations in the country, but now it expects to get just $255 million for its former assets. Despite this, ExxonMobil hasn't been afraid to look elsewhere. It hopped across the ocean to Angola where it has deep-water operations. It is also exploring off the cost of South Africa.
The Brazilian Petroleo Brasileiro S.A. (NYSE: PBR) has also played a big role in growing South America's oil potential, with many deep-water finds. The problem is that these areas are very expensive to develop. The company has been forced to set aside $106.9 billion for production development from 2013 to 2017.
The major downside of Petrobras is that the government sets the price of gasoline, and the company is stuck with the bill. Brazilians are ready to protest against increasing transportation costs, and Petrobras' upstream losses are here to stay. The government's first priority is not profits, and the recent protests will only make price increases that benefit Petrobras more controversial.
Another important play in South America is Argentina. The government recently removed its national oil company from Spanish hands. Now the country is looking for foreign investment to help it extract oil from its Vaca Muerta region.
Apache (NYSE: APA) is a smaller oil and gas company with a proven history of bringing new fields online in developing countries. Given the political risks of Argentina, Apache is a great way to invest in the nation. Just 4% of the company's proven reserves are in Argentina. This gives Apache upside possibilities, but the possible nationalization of its assets would not be the end of the world.
ExxonMobil is the old vanguard of the oil industry. It boasts a very strong return on investment (ROI) of 27.3% and a low total debt to equity ratio of 0.08. Out of the three companies listed here, ExxonMobil also has the strongest return on equity (ROE) of 28.5%. This company's downside is that it is so huge that it needs to keep making major discoveries to maintain its current production. In the long run its growing liquefied natural gas (LNG) assets should be to stabilize its income.
Relative to other oil majors, Petrobras does not look too attractive. Its ROI of 2.7%, ROE of 4.2% and profit margin of 7.6% place it a step below ExxonMobil. Given the nature of public companies to support the public at the cost of profits, it is expected that Petrobras' ROI will remain compressed. Petrobras is helping the world to defeat declining oil production, but that doesn't guarantee profits.
With an ROI of 6.3%, and ROE of 8.8%, Apache's financials don't look very encouraging. Its total debt to equity ratio of 0.41 is higher than ExxonMobil's, but Apache is pursuing asset sales that could lower its debt load and return more cash to shareholders. Another risk is its Egyptian presence. Given the recent upheaval in the nation, there is a chance its Egyptian production could face some struggles. Overall Apache is a small but growing exploration firm.
New reserves are being found in the southern hemisphere, and ExxonMobil in taking a lead in many parts of Africa. Brazil's Petrobras sounds like a good investment, but the awkward public-private partnership and recent protests make it likely that Petrobras will be stuck paying for more public subsidies. Apache is a growing international play with a number of international fields, including in Argentina and Western Australia. ExxonMobil and Petrobas are two interesting investments that are hard at work increasing their reserves.
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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). The Motley Fool owns shares of Apache. 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!