Petroleo Brasileiro Petrobras SA (PBR) and Total SA (TOT) are two large cap, oil and gas integrated companies offering steady income and currently trading at low Forward P/E. Both stocks had received positive upgrades from analysts recently and will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
Petroleo Brasileiro Petrobras SA
PBR is a Brazil-based integrated oil and gas company, controlled by the Brazilian government. PBR was up 2.36% and closed at $17.81 on March 15, 2013. PBR had been trading in the range of $14.40-$28.70 in the past 52 weeks. PBR has a market cap of $116.16B with a beta of 1.48.
On March 7, 2013, Credit Suisse upgraded PBR from neutral to outperform with a price target of $25.00. Analysts stressed they have been cautious for years but added that the recent move to raise diesel prices may be the beginning of a change in attitude, and the company might be at a "inflection point". PBR had gained 22.91% since the closing of March 5, 2013.
Analysts currently have a mean target price of $25.71 and a median target price of $24.10 for PBR. Analysts are estimating an EPS of $0.63 with revenue of $36.11B for the current quarter ending in March 13, 2013. For 2013, analysts are projecting an EPS of $2.22 with revenue of $154.28B, which is 7.10% higher than 2012.
On March 15, 2013, PBR stated it will keep its 5 year capital spending plan at $236.7B according to the original plan. Petrobras' previous 2012-2016 plan called for investments of $236.5B. PBR will continue to speed up and streamline development of giant offshore oil resources.
There are a few positive factors for PBR:
- Higher revenue growth (3 year average) of 7.3 (vs. the industry average of 1.6)
- Lower P/E of 10.1 (vs. S&P 500's average of 16.2)
- Lower P/B of 0.7 (vs. the industry average of 1.5)
- Lower Forward P/E of 6.2 (vs. the S&P 500's average of 13.9)
- PBR is currently trading below its book value of $25.83 per share
- PBR offers a forward annual dividend yield of 1.40%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. The momentum indicator, RSI (14), is indicating a strong buying momentum at 61.85. PBR had just broken through and closed above its 50-day MA of $17.57 on the last trading day while still trading below its 200-day MA of $19.83, as seen from the chart below.
How to Invest
Strong capital spending accompanied with continuous operating cost optimization, PBR is an attractive buy at current valuation, while it trades below its book value of $25.83. If it can hold above its 50-day MA, bullish investors can review the credit put option spread of July 20, 2013 $14/$16 put to gain some upside credit premium or to acquire PBR share at a price below $16 upon options expiration. Investors can also review the following ETFs to gain exposure to PBR:
- Energy GEMS ETF (OGEM), 6.92% weighting
- BRIC ETF (EEB), 4.80% weighting
- SPDR S&P Emerging Latin America ETF (GML), 3.12% weighting
Total SA is a France-based integrated international oil and gas company. TOT was down 0.06% and closed at $50.81 on March 15, 2013. TOT had been trading in the range of $41.75-$56.16 in the past 52 weeks. TOT has a market cap of $114.71B with a beta of 1.02.
On February 22, 2013, Canaccord Genuity upgraded TOT from hold to buy with a price target of $60.00. Analysts currently have a mean target price of $58.32 and a median target price of $59.72 for TOT. Analysts are estimating an EPS of $1.71 with revenue of $66.80B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $6.65 with revenue of $256.30B, which is 0.30% lower than 2012. However, analysts are predicting revenue of $271.50B for 2014, which is 5.90% higher than 2013.
On March 11, 2013, Total announced the restart of production on the Elgin/Franklin area on 9 March 2013, following the approval of the safety case by the UK Health and Safety Executive. Production was stopped since 25 March 2012 when a gas leak caused by a combination of several unprecedented events occurred on the G4 well shut-in several months before. Production from the Elgin/Franklin area totaled over 700M barrels of oil equivalent (Mboe) by the end of 2012. The remaining reserves are in excess of 500 Mboe and were not impacted by the Elgin incident. Production resumes gradually and should soon reach close to 70,000 barrels of oil equivalent per day.
There are a few positive factors for TOT:
- Lower P/E of 8.4 (vs. the S&P 500's average of 16.2)
- Lower P/B and P/S of 1.2 and 0.5 (vs. the industry averages of 1.5 and 0.7)
- Lower Forward P/E of 6.8 (vs. the S&P 500's average of 13.9)
- TOT generates an operating cash flow of $29.08B with a levered free cash flow of $5.20B
- TOT offers a forward annual dividend yield of 5.50%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is nearly neutral at 52.87. TOT is currently trading between its 50-day MA of $51.16 and 200-day MA of $47.94, as seen from the chart below.
How to Invest
While PBR offers a better turn-around story, TOT offers a higher dividend income with a lower volatility. At current valuation (Forward P/E of 6.8), TOT remains a good buy. For bullish investors, a credit put option spread of May 18, 2013, $42.50/$47.50 can be reviewed. Investors can also review the following ETFs to gain exposure to TOT:
- BLDRS Europe 100 ADR Index Fund (ADRU), 3.90% weighting
- BLDRS Developed Markets 100 ADR Index (ADRD), 3.14% weighting
Note: All prices are quoted from the closing of March 15, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PBR over the next 72 hours.