Zacks senior Latin American markets analyst Claudio Freitas, CFA has recently upgraded the ADRs of Brazilian oil giant Petroleo Brasileiro S.A., or Petrobras (PBR), from a Hold to Buy. Here are some of the reasons behind his decision:
'We are changing our current recommendation on Petrobras ADRs from Hold to Buy. We like Petrobras for its positive production-growth profile and the improving outlook for its downstream business. Moreover, the recent discovery of the Tupi field opens up a new range of possibilities for the company in the long-run.
'The continued increase in oil prices is also a positive. The company has a long inventory of development projects, and the continued improvement of the Brazilian economy will certainly lead to a country risk upgrade that will make Brazil investment grade shortly.
'At current levels, Petrobras ADRs are trading at 19.8x our 2007 earnings estimate, at a considerable premium over the industry mean of 13.9x. However, after the discovery of the new Tupi oil field and the new area with a reserve potential supposedly over 60 billion BOE (barrels of oil equivalent), PBR is now trading with a premium as a result of its fantastic long-term growth potential.
'We must also consider the positive outlook for Brazil in the short-term and the considerable likelihood for a country upgrade in the short-term making Brazil investment grade, a fact that will have meaningful effect on the valuation of the Brazilian stocks. Considering all these factors our current recommendation on PBR changes from Hold to Buy and we expect the company's P/E multiple to expand to somewhere between 22.5x and 23x our 2007 earnings, a 65% premium over the industry average, a reasonable premium if we consider the potential of the new oil fields. Our six-month target price is $123.75.'
Read the full analyst report on PBR.
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