Your Latin American Oil Watchlist

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In my array of posts about Latin American stocks I would like to make a special post on the biggest Latin American state-controlled oil companies that currently trade on the NYSE. The boards of these three companies are controlled by their respective government, all of them have world class reserves, are leaders in the local downstream market, and operate in high growth countries. The three companies are the Colombian Ecopetrol (NYSE: EC), the Argentinean YPF (NYSE: YPF) and Brazil's Petrobras (NYSE: PBR).

EC, the Colombian oil champion, has been praised by investors even though it's 88.49% owned by the government. Its share price advanced over 31% in 2012 and is currently trading at x7 EV/EBITDA. Colombia has been growing strongly during the last five years (growth is expected to be 4.2% in 2012 and 4.4% in 2013) and, with a pro-market economic policy, it has been praised by investors. The company has been performing in line with high expectation, although it reported weaker results in 3Q 2012 as EBITDA declined 10% Year over Year (YoY).

That said, fundamentals remain strong: leverage is extremely low (interest coverage at almost x42), revenues increased (+1% YoY), total production increased 2% YoY ,and management stated that they expect to reach their production target of 780mn boepd (versus 670mn boepd in 2011).

Even with great fundamentals, Colombia became too expensive and excitement about EC. This reminds me of PBR.

PBR used to be the Latin American Vedette. It had some huge off shore discoveries, but after some disappointments at the operating level the market has been tough, and PBR is down 23% in 2012 after a 34% decline in 2011. PBR's poor market performance is explained by poor operating results: a 3% quarter over quarter (QoQ) decline in production, 17% QoQ underlying lifting cost increase, and 14% QoQ increase in refining costs (21% including wage increases). The only two positive effects in the quarter were some price increases and a 98% refining utilization rate, but they weren't enough to de-leverage the balance sheet (debt stands at x2.4 EBITDA).

PBR is trading at an estimated, and unexciting, x6.8 EV/EBITDAX with a 7% ROE. That said, I don't think there is much downside from here with the Brazilian economy about to rebound in 2013 (to a 4% growth rate from a 1.5% GDP growth rate in 2012) and price hikes coming for the next two years. I think PBR is a valid bet on Brazil, given its huge reserves and its unparalleled market position. Its not a steal, but it is a solid investment.

YPF, the company the Argentinean government just took over (it now owns 51% of the company) from Spanish Repsol, has control over huge gas and oil reserves in the Vaca Muerta Formation in the South of Argentina – actually it controls the third biggest shale reserves in the world.

The stock's valuation, after a 70% fall this year, seems ridiculously low at x6.5 P/E and x2 EV/EBITDA, but there are good reasons for this. Argentina has had an ant- market rhetoric, and profits from YPF could start being used to finance Argentina's growing energy import bill (years of underinvestment made Argentina a net energy importer).

That said, YPF's new management is highly professional and they intend to invest over $37 billion over the next 5 years to make Argentina once again an energy net exporter. Those resources will not be easy to come by, but management is doing whats possible to comply with its business plan: stabilizing production (flat QoQ) to then try to grow it in 2013 with additional drilling rigs, pushing for price increases, pursuing downstream projects to increase production, and trying to secure financing via partnerships and debt markets.

YPF's asset base has huge value, and over time that value will be untapped. Potential is huge, but risks are also great. I am considering YPF again; there is a price for everything.

Between these three companies we have a huge share of the world's future probable oil/gas reserves. Patience is needed and governments are difficult to predict. I would consider the three companies here for a place in my portfolio, but right now only PBR and YPF offer tempting entry prices with considerable risks. Keep those three names in your watchlist.  


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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!

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