1 Undervalued Energy Play

Crude oil prices are now the highest since the "super-spike" in 2008. With the Brent benchmark inching past $125 per barrel, HSBC Chief Economist Stephen King has gone to the extent of terming oil as the new Greece. In other words, crude oil has become the new source of anxiety for investors around the globe.

Yet this doesn't come as a huge surprise. While deteriorating relations between Iran and the West are fueling supply-side fears, an improving job market in the U.S. has speculators betting on a growth in demand for crude oil -- the perfect catalysts for rising crude prices.

Given the uncertain situation, I'm going to show you an energy stock that looks like a long-term winner to me: Petroleo Brasileiro (NYS: PBR) , or Petrobras to most regular investors.

Why Petrobras?
How is this company different from the others operating in the same line of business? The state-run Brazilian integrated oil and gas company has been adding reserves at a breathtaking pace, and more importantly, it's been developing these reserves at an equally fast pace.

Petrobras shot to prominence through its discovery of the Tupi oil field in the pre-salt Santos basin. Considered to be the largest oil discovery in the past 30 years in the entire Western Hemisphere, this field is estimated to hold between a massive 5 billion and 8 billion barrels of oil equivalent, or Boe. The Guara well, another discovery in the Santos Basin, is estimated to hold 2.1 billion Boe, mainly consisting of light oil and natural gas.

With the intent to make profits while crude prices are high, Petrobras has ramped up production significantly. In December, average daily production stood at 133,000 Boe, a steep increase from 71,000 Boe at the start of 2011.

Right place, right money
The waters off the Brazilian coast are rich with what's called pre-salt oil reserves. Each of the 37 wells Petrobras drilled here in 2011 have hit oil. In all, proven reserves have reached 16.4 billion Boe. Now this is where I see potential. With fears of a shortage in global crude oil supply, the Brazilian reserves are among the most exciting prospects in the exploration and production space.

Petrobras plans to spend a whopping $225 billion to develop these reserves and double its output by the end of this decade. However, it must be kept in mind that the installed capacity to dig out the resources off the Brazilian coast has yet to match up to proven reserves. And as of now, the company doesn't look capable of pulling out the hydrocarbons all by itself. But help is at hand.

Solid partnerships
(NYS: CVX) and Statoil (NYS: STO) have sizable stakes in these reserves and jointly look to develop them with Petrobras. Chevron holds a 37.5% stake in the Papa Terra project, operated by Petrobras in the Campos Basin. Statoil holds a 35% stake in the Pao de Acucar project, a 250 million Boe discovery, where Petrobras holds a 30% stake.

On the production side, Petrobras has enlisted the help of deepwater drilling giant SeaDrill (NYS: SDRL) . With five-year charters drawn up, the oilfield services company has four of its rigs contracted until 2015.

Is the stock cheap?
Given the quantity and quality of assets, Petrobras looks pretty attractive at this point. Here's how it stacks up against its fellow integrated oil and gas counterparts:


Price-to-Earnings (TTM)




















Source: S&P Capital IQ; TTM = Trailing 12 months.

On an earnings basis, the stock trades at a 14% discount to its peer -group average. If you're making a decision on this stock based only on its not-so-impressive earnings, here's why you should think again: The new CEO, Maria das Gracas Foster, has already laid out big plans for the company's lagging refining segment, which should ensure that there are no rotten eggs in the basket.

On the basis of book value, Petrobras looks the cheapest by far. The company's assets look potentially undervalued to me. This is where a long-term investor should see an opportunity.

We at The Motley Fool will help you stay up to speed on the top news and analysis on Petrobras. You can start by adding it to your Watchlist. If you like energy stocks, we have a stock idea that could knock your socks off. Read about it in The Motley Fool's special free report on the energy industry and its best prospects. It's free for a limited time.

At the time thisarticle was published Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Statoil A, SeaDrill, ExxonMobil, Chevron, and Petrobras. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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