(Idea) Petrobras - Undervalued And Attractive

Petroleo Brasileiro S.A., or Petrobras (PBR), is Brazil’s national oil and gas company. The company owns and operates exploration and production assets, infrastructure, and 11 refineries. In the first quarter, PBR produced 2.78 million boe/d, split 73%/27% between liquids and natural gas. PBR accounts for 88% of Brazil’s oil and gas production. It also controls 93% of Brazil’s refining capacity. It owns 26 oil tankers, which partially insulates it from the volatility of the global tanker market.

PBR’s economics are relatively straightforward for an operation of its size. PBR’s financial results are dominated by its E&P segment. E&P segment net income typically accounts for 80% to 85% of total corporate net income. Meanwhile, its vertical integration gives it a competitive advantage against domestic refiners.

Analysis becomes more complicated when factoring in the impact of Brazilian politics. The multitude of risks that stem from Brazil’s always fluid political situation call for regular monitoring by PBR investors.

PBR’s U.S. American Depository Receipts for its common shares are listed on the New York Stock Exchange and currently trade at approximately $15. We value the shares in the range of $20 to $25, but a large margin of safety is necessary due to risks pertaining to Brazilian politics and PBR’s long-term production prospects.