PBR: AS TASTY AS BEER?

I like PBR. It's cheap and it makes me feel good when I see it in front of me. Just for clarification, I am talking about Petroleo Brasileiro and not Pabst Blue Ribbon! Now lets take a look at the stock below.


Petroleo Brasileiro (PBR) is an oil and gas company with operations in Brazil and a market cap of $214Billion. The company operates in five different segments; exploration, production and refining, transportation, gas/energy and international. From the exploration and refining segments, the PBR operates approximately 100 platforms and 16 refineries.


Before we can consider PBR a buy, lets look at some of the pros and cons first:


Pros:
- P/E of 8.4.
- Holds the potential to become major oil exporter (China, other BRICS).
- Price/Book ratio of 1.12.
- 42% rise in Q1 net profit from previous year quarter.
- 9% rise in Q1 revenue from previous year quarter. 
- Favorable treatment from Brazilian government.


Cons:
- Increasing regulations on deepwater drilling. 
- Growing debt to equity ratio.
- Government interference and a movement towards ethanol use.
- Low dividend yield.
- Unstable inflation rates in Brazil.


Conclusion:
PBR appears undervalued and is currently trading at relatively cheap levels. With a P/E ratio of 8.4 and strong growth rates, the company looks poised to do well in the future. With oil demand expected to rise, PBR is positioned itself to become a major oil exporter to countries like China. Lastly, the company receives favorable preferential treatment from the government (which takes a hands on approach to the industry) which bodes well with long term aspects.


There are a few concerns that must be mentioned. The previously stated high level of government intervention can be causes for concern in the future. High levels of state-controlled exploration and regulation may hinder PBR in the future, however these concerns have not yet been that detrimental. The company must also raise large amounts of financial capital ($224Billion), much of it done through stock offerings, that is increasing the debt-equity ratio percentages. Lastly, the company does not pay out a particularly stunning dividend, and it does not look like it looks poised to do so in the near future.


To conclude, PBR looks to be the main beneficiary of a growing Brazilian economy and a rising demand for oil. The company is undervalued with a P/E that is less than 10. Growth as remained strong and the company also looks to benefit from growing energy needs in China. The 'hands on' approach by the Brazilian government may prove to be a hindrance in the future and the dividend is not something to brag about. 


PBR is currently trading at cheap levels and remains undervalued; owning the stock looks to be a good bet for the short/long term future.


I do not own PBR and do not look to open a position in the near future.