New discoveries. Worldwide oil demand might be off. But it’s temporary. And even if demand miraculously plateaus (don’t count on it with gas below $2 per gallon), the world would still “need to replace one Saudi Arabia per three years,” according to Petrobras’s CEO. No other company is making bigger discoveries than Petrobras. In fact, the company’s recent finds could triple its reserves. And as we all know, the country with the oil is always in control!
Long-term focus. With crude below $40 per barrel, most oil companies are cutting back on exploration and development. Not Petrobras. They plan to spend $174 billion by 2013, which ensures they’ll have plenty of products to sell when oil prices climb higher.
Low cost. Management estimates it can be profitable on new projects, even if crude oil stays around $45 per barrel. Few - if any - other major oil producers can claim such a low hurdle rate. Basic economic principles govern here - the low cost provider of a commodity enjoys the most profits when prices rise. And share prices often go along for the ride, too.
Deep-water expertise. All the easy-to-find crude oil is gone. But Petrobras is an expert in deep-water exploration. That’s a competitive advantage no other oil company can touch. And it should continue to help Petrobras add reserves at much lower costs than its peers.
Valuation. Emerging markets took it on the chin - twice as hard as the United States - despite stronger underlying fundamentals. It’s pointless to argue whether or not it was deserved. What matters is many high-quality stocks got caught up in the downdraft and now trade at mouthwatering levels. Petrobras is no exception, trading for less than 10 times earnings.