Petrobras: the undervalued Brazilian oil giant that has further to run

Petrobras: the undervalued Brazilian oil giant that has further to run
25 February 2022

The oil price had already been on the up for months, because the world simply doesn't produce enough of the fossil fuel.

The conflict in Ukraine could make oil scarcer still. As much as I don't like benefitting from armed conflict, the world needs to keep operating, and it needs a lot of oil to do so. More oil, in fact, than many predicted.

The world is unlikely to wean itself off the black stuff anytime soon. To be precise, the world economy will remain addicted to oil well into the 2040s. Right now, fossil fuels account for 83% of the global energy consumption, and oil is the single largest component of the world's energy supply.

Under the current circumstances, what is one of the best oil stocks in the world to invest in?

Petrobras in Brazil should qualify.

If you'd like to earn a ≈25% dividend yield and invest into a world-class company at an extremely low EV/EBITDA multiple of 3, then read on.

Stepping in to satisfy global demand

Forgive me for a Weekly Dispatch that partially repeats something that I've already covered previously, but today's article is probably one of the most useful pointers that I can give you right now.

In late December 2021, I focussed some of my research on the global oil market. I highlighted the increasing scarcity of oil, and introduced Undervalued-Shares.com Members to Brazil's national oil company, Petrobras.

It's not that the planet would be running out of oil anytime soon. The scarcity we experience is caused by a long-running lack of investment in production capacity. There is enough oil in the ground, but not enough investment from the West to get it out.

One company had recognised the opportunity ahead of time, and it acted accordingly.

Last year, Brazil's national oil company decided to embark on a large-scale investment programme. Between 2022 and 2026, Petrobras is set to invest a staggering USD 68bn to explore new oil fields and start additional oil production. Even by the standards of the global oil industry, that is one hell of a large investment.

The company is entirely unapologetic about using this unique opportunity for the benefit of its shareholders. Thanks to Europe and the US winding down their investments in fossil fuels, it becomes all the more lucrative for others to step in and make up the shortfall.

Now add to that what's just happening in Ukraine and the worries it causes about Russian oil deliveries to Western clients.

It's no wonder that Petrobras stock is up 36% in the nine weeks since I published my research report. It's up that much at a time when most other stocks are down. And it should have even further to run throughout 2022, given the numbers the company just published.

An annual dividend yield of ≈25%

Two days ago, Petrobras posted its fourth quarter results. The company's free cashflow of USD 7.5bn was humongous. Despite using some of the cash to reduce debt, Petrobras will pay out a quarterly dividend equivalent to 7.9% of the share price.

That is a QUARTERLY dividend of 7.9% of the share price, not an annual dividend.

Two months ago, I predicted that Petrobras could be paying a 30% dividend yield for 2022. Ahead of putting my research report online, I was wondering whether readers would declare me mad. However, under the new circumstances, one wonders if the figure might not even be higher in the end.

At an oil price of ≈USD 100 per barrel, Petrobras has the proverbial license to print money.

Granted, the company has its issues, too. For example, Brazilian politics sometimes makes for unpleasant surprises. However, I consider all of this priced in already – and then some.

Given its location in South America, Brazil suddenly almost looks like an oasis of relative calm. As I wrote in my report:

"Brazil is a politically neutral country and Petrobras operates its own fleet of 131 oil tankers, which enables the company to deliver to literally anywhere in the world."

The world needs oil, and Petrobras is ready to deliver it at prices that we last saw in 2014.

Much as the stock has already moved up, it probably has further to run because:

  • Energy markets are likely to remain tight, keeping the oil price up.
  • The company's investment programme is proving spot-on and enables it to deliver increasing amounts of oil to its clients.
  • Management is delivering on its promise of a generous dividend policy.
  • The stock is trading at an unbelievably low EV/EBITDA ratio of 3, even now.

The stock is up at USD 15 as I write this, compared to USD 11 when I first published my report. I wouldn't be surprised if it soon moves beyond USD 20 - when it would STILL be cheap.

Which is why I wanted to point out this opportunity once more. If you haven't read my research report on Petrobras already, please do!

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