By Sean Geary
As of Monday's close, Colombian oil company Ecopetrol (EC) once again has a larger market cap than Brazilian giant Petrobras (PBR). Do current market prices for these equities reflect their true valuations?
With Ecopetrol's 25% gain over the past year, the Colombian firm has substantially outperformed its Brazilian counterpart. Petrobras lost almost 40% of its market capitalization over this period.
Both companies produce the same commodity as a principle source of income, and Petrobras has roughly three times the revenue of Ecopetrol -- so what could explain this stark divergence in performance?
The primary explanation is the role of the companies' respective state governments. While the Colombian government has placed an emphasis on building a business-friendly regime with minimal government interference, the Brazilian government under Dilma Rousseff has concentrated on inequality reduction, often at the expense of big business.
During the Rousseff administration, Brazilian companies have seen a substantial increase in government interference. Petrobras is required to sell certain quantities of domestic fuel at government-mandated prices and forced to pay additional taxes. Other Brazilian firms like Vale (VALE) and Itaú Unibanco (ITUB) have suffered a drop in share price thanks to similar interference.
On the other hand, the concerted effort made by the Colombian government to create a healthy market has been rewarded by investors. Some pundits argue that Ecopetrol's 50% rise over the past 15 months has as much to do with the fundamentals of the Colombian economy as it does the company itself.
Because of the limited size of the Colombian exchange (GXG), retail investors and pension funds have a limited number of companies from which to choose, whereas Brazil's Bovespa (EWZ) is a more developed stock market with a more diversified crop of large-cap, dividend-paying stocks. As a result, Ecopetrol's valuation may be somewhat stretched at these levels. While the stock could have a bit more upside, especially if the underlying price of crude rises, EC's run could be close to an end.
On the other hand, Petrobras remains at dirt-cheap valuations -- with good reason. The government has shown little sign of relenting on its current policies. However, investors with a very long-term horizon who believe Rousseff will eventually give the company more free reign could be rewarded for their patience.