Time to Buy Petrobras Energia Participaciones?

Watching the oil and gas names this earnings season, we have seen an amazing number beating earnings estimates. Many of these names have hedges in place causing losses, and I am guessing this trend will continue. The oil and gas exploration names are not limited to the likes of Exxon (XOM), but many smaller players that not only realize growth through price, but also production. These increases are exponential as they are bringing on line many of their current projects but also moving faster to get other more difficult wells up and going based on a belief that the price of oil will continue to go higher. There are also new technologies that are making it much easier to drill shales, oil sands, and other obstacles once thought of as impossible.

So price is not the only driver. Look at natural gas, as CHK has had a phenomenal run and are now drilling shales with new horizontal wells that are not increasing prices as their cost per Mcfe is actually staying constant.

The companies that look to be doing the best are the smaller, less covered companies. Petrobras Energia Participaciones (PZE) only has one analyst covering their quarterly earnings. One of two things is happening, either the analyst is going to get sick of being wrong or PZE will get tired of underperforming. One thing is for sure, this company finally looks to be fairly valued.

After missing estimates for the last four quarters, they look ready to beat. Over the past 90 days estimates for this quarter have been raised 17%, but more notably they have been raised 13% in the last week. Last year for this quarter they earned $.28 per share and with the current raised estimates it equates to an earnings increase year over year of 28%. This seems high, but when you take into account the price of oil doubling since the beginning of the quarter the benefit of the doubt rests with PZE.

Current estimates for the quarter only increase revenue by 4% year over year, which also seems low. When you look at full year earnings increases, which have 4 analysts covering, we see an increase of 32%. If this number is correct (which I believe will be higher) the earnings number for this quarter should be closer to $.37. Since the strongest portion of pricing power for oil and gas was this quarter they should destroy this number.

The chart also tells a story. Back in 2004 they began a pattern that was flat with support of $9 and resistance of $16. At the beginning of this year there was a huge jump in volume as Jim Cramer did a bullish commentary on the stock. This pushed volumes to all time highs and set a resistance of $16 in the stock 6 million shares traded. On March 19th the stock bottomed and has begun an uptrend. On April 15th the stock experienced a double top breakout and the current trend points to an $18.50 target. Yesterday the options were bullish and a top was set at $13 waiting for a possible run to $16.

The downside to this stock is that it is owned and operated in Argentina. This country is not very stable and they are well known for using price controls which have hurt the stock over a period of time, but I think the market was right on this one, they were just a bit early. There is little to lose even after today's run as the company sells for 15 times earnings while earnings are projected to increase 37% for 2008. The forward PE adjusts to less than ten. The short term PEG ratio is nice protecting downside. I would buy the stock before earnings but I would sell at around $11 to protect downside. I would sell at $16 as it will take another remarkable volume take to move past this point.

I do believe we will see the company buying back shares and possibly increasing their dividend. Not to mention, there should be a notable pay down on their over $2 billion in debt. Buy this long or short.

Disclosure: None