Indebted Petrobras Is a Great Long-Term Investment

Jaiyant is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Petrobras (ADR) (NYSE: PBR), the Brazilian semi-public oil giant, is seeing some of its worst days in company history. The company's stock price has come down by almost 20% since May. The decline is attributed to a weakened Brazilian economy, which has struggled to keep pace with a strong U.S. currency. Petrobras is also one of the most indebted companies in the world and much of its debt is dollar-denominated. At the moment, Petrobras is selling imported diesel and gasoline at a loss in the domestic market. However, this is also the right time to invest in Petrobras and in this article, I shall explain why.

A weak Brazilian economy and an indebted Petrobras

As I mentioned before, the Brazilian economy is not doing well at all. And there is no sign of its economy picking up anytime soon, especially with all those violent protests across the country. Petrobras has had to meet increasing demands for energy domestically. Brazil is a country that veers toward the left, which means people pay a lot of tax and a lot of facilities are subsidized.

Whether these facilities are actually helping Brazilians or not is a different story altogether. These subsidies affect companies like Petrobras indirectly, which are already reeling under heavy international debts, reduced international demand for products, and a very weak Brazilian currency. Currently, Petrobras is probably one of the most undervalued stocks out there.

Petrobras' semi-public status will protect it

The Brazilian government owns 54% of the shares and holds voting rights to the company. Through the Brazil's Sovereign Wealth Fund and the Brazilian Development Bank, it owns a further 10% of the shares, bringing its direct and indirect ownership to 64%. The rest of the shares are privately held. As the Brazilian government holds voting rights and holds the majority of shares, Petrobras will be aided by Brazilian taxpayers' money, even if there are going to be hard days ahead. 

Petrobras is undervalued, but not for too long

With a five-year expected PEG ratio of approximately 0.7, a price-to-sales ratio of 0.6, and a price-to-book ratio of 0.6, it's certainly swimming in undervalued territory. However, I do not see the company struggling for a long time in the future.

Here are four reasons why Petrobras' shares will pick up in the coming years:

1.) To meet domestic fuel demands, Petrobras has purchased its first shipment of LNG from Sonangol, Angola. Some 96 million cubic meters of natural gas was shipped from Soyo to Rio de Janeiro. Petrobras' decision to forge import agreements with Sonangol will increase its options to purchase LNG and meet domestic demands.

2.) Petrobras is also in talks with China's Sinopec to construct a $20 billion refinery in the state of Maranhao. The refinery is expected to produce 300,000 barrels a day, easing Petrobras' troubles a bit. This refinery is one of the four which Petrobras hopes to commence by 2017 so that it can produce 3 million barrels per day by 2020.

3.) Petrobras announced that it would sell and restructure its assets in order to raise almost $10 billion and cut costs by $14 billion.

4.) In early June, Petrobras signed a deal with South Korea's GS Holdings to build a 300,000-barrel-per-day refinery near Fortaleza.

These practical steps to reduce costs, raise capital and forge new relationships with foreign companies to import LNG in order to meet domestic demand and build refineries to export gas internationally will help Petrobras to save itself from the mess it finds itself in. However, that will take time and its share price may tumble further.

Ultrapar is a strong buy

Another Brazilian oil and gas company that is a good investment choice is Ultrapar Participacoes (ADR) (NYSE: UGP). Analysts at Zacks currently rank it number one and a 'Strong Buy.' Ultrapar has also entered oversold territory, which means a lot of people have the same idea: to invest in a promising stock when the time is right.

Ultrapar has operations in Venezuela, Brazil, the USA and Argentina. It distributes fuel, produces chemicals and offers integrated logistics solutions as well. It is the largest LPG distributor in Brazil and one of the most stable companies in Brazil at the moment, in spite of the tumultuous economy.

Ultrapar is exceptionally healthy, when we consider its current ratio of 2.0. Though it has debt of $2.9 billion, it also has total cash of $1.0 billion, operating cash flow of $1.0 billion and revenue of $27.1 billion. Any current ratio that is between 1.5 and 3.0 signifies that a company is healthy. Ultrapar certainly is using its investors money well to fund its business and going forward, I can see the company being managed effectively. With a market cap of $12 billion and a price-to-sales ratio of 0.4, Ultrapar certainly looks like an attractive stock to invest in.

Chevron’s saga in Brazil and beyond

Chevron (NYSE: CVX), which spilled more than 100,000 gallons of oil into the sea near Rio de Janeiro, has had to fight a very long legal battle. After several months of legal wrangling, Brazil authorized Chevron to resume its operations off the coast of Rio. Chevron had not only been banned from operating at Frade field, but also in other parts of Brazil. Chevron still faces two civil suits that may force the company to pay $20 billion in damages.

Moreover, Chevron's problems with regulators are not limited to Brazil alone. It has faced an infamous battle with Ecuadorians, who managed to get Argentina to freeze Chevron's assets within the country as well. That judgement was overturned by a court in Argentina recently. With a PEG ratio of 11.7, Chevron is very overvalued, though it reports good revenue and has seen a growth in its share price.

Chevron has a current ratio of 1.6, which shows that it is certainly within the territory of being a healthy business. It has a total debt of $14.1 billion. However, its total cash is $19 billion and its operating cash flow is $36.1 billion, which keep its debt ratios healthy. With revenue of $218 billion, Chevron certainly is a gigantic company to invest in, albeit with its own risks because of the risky countries it deals with. Going forward, Chevron’s businesses in risky countries like Argentina, volatile regions of the Middle East and Western Africa and politically charged countries like Russia will keep its numbers oscillating.

Debts, sluggish growth and weakened profits make Petrobras attractive

You read that right. These are the reasons why Petrobras is undervalued at the moment but the company is taking all the necessary steps to bounce back. Being a semi-public company, it will require much time to fix its numbers but that very status will help it too. It has the support of Brazilian government and is making every effort to raise money and reduce debts. Moreover, if I consider Chevron’s lawsuits and legal expenses, Petrobras certainly looks like a more stable investment option in the long term.

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Fool contributor Jaiyant Cavale holds no financial position in any companies mentioned here.

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