Petroleo Brasileiro On The Rebound With More Potential Upside

| About: Petrobras - (PBR)
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By Jonathan Yates

Brazilian oil and natural gas company Petroleo Brasileiro (NYSE:PBR) (a.k.a. Petrobras) has rebounded recently, up 8.12% for the week and 17.35% for the month. Over the same time periods, the main exchange traded fund for oil, The United States Oil ETF, LP (NYSEARCA:USO), has risen by 2.29% and 8.23%, respectively.

Over the past year, Petroleo Brasileiro is down 21.30%. The global economic slowdown, particularly in China, has lowered the price of oil; weakness in the Brazilian economy has also adversely affected the company. Dealing with the Brazilian government has taken its toll on Petrobras shares.

However, as one analyst noted about the long term upside for Petroleo Brasileiro:

"Brazil has huge foreign reserves relative to its GDP and a relatively high prime rate right now. So, its government still has high power in untapped monetary and fiscal measures to stimulate its economy. In addition, since Rio Olympics is still four years to go and a large amount of construction projects has still to be done, Brazil's economy and oil consumption will be further spurred by Olympics games over the next three to four years. Don't forget how much Shanghai index rose over the four year period before the Beijing Olympics. The stock has dropped 73% from its all-time high, but has a great potential return."

While investors are waiting for this projected "great potential return," the superior dividend yield of Petroleo Brasileiro makes it that much easier for long-term investors to patiently wait for a recovery. The average dividend for a member of the Standard & Poor's 500 Index has a dividend yield of around 2% with a historic payout ratio of around 50%. Petroleo Brasileiro has a dividend yield of 4.53% with a low payout ratio of 36.84%. That offers ample cash flow for Petrobras to increase its dividend or initiate a share repurchase program in order to lift the stock price.

Although a nice gain has been posted by Petrobras, much of that can be attributed to tensions with Iran. However, the current price for Petrobras is well below its high for the year. There is deep value in the shares of Petroleo Brasileiro. The forward-price-to-earnings ratio is 7.5 and both the price-to-sales ratio and price-to-book ratio are under 1.

At around $21.98 a share, given the mean analyst target price for Petroleo Brasileiro over the next year of market action is $32.58, there remains substantial upside in this Brazilian oil producer.