Big Boost Coming for 2 Brazil Stocks

01/18/2012 11:30 am EST

Focus: GLOBAL

Rudy Martin

Editor, Investing Insight

There’s nothing like finding undervalued, overlooked stocks in markets where growth is still marching forward, writes Rudy Martin of Latin Stock Investing.

Brazil has long been synonymous with a relaxed lifestyle. But it’s the investment attraction that is creating new fans for this emerging energy superpower.

Brazil is a already a top ethanol producer, and recent oil discoveries now have some believing that Brazil will one day become an oil-exporting superpower. Oil and natural gas potential reserves in Brazil are now recognized as some of the largest in the world; since 2002, over 9 billion barrels of oil equivalent (boe) have been discovered in more than 50 new oil and gas fields.

The obvious good first choice for long-term quality investors is Petrobras (PBR). As the discoveries turn into production, Brazil will be an oil-rich country. That is likely to fuel growth at PBR for many years to come.

PBR shares are trading well below the 52-week high—and even below book value of $27. This looks like a solid buy for long-term investors.

This is a big game and requires significant capital. And the markets have not been kind to those that do not have resources or partners to complete projects.

This week the Brazilian unit of French oil and natural gas company Perenco kicked off the new year by selling a 10% stake to China’s state-run Sinochem Group. Last year, Perenco canceled plans for a $511 million initial public offering of shares after market conditions deteriorated due to the ongoing European sovereign-debt crisis.

The Perenco-Sinochem deal was the latest in a series of transactions that have seen Chinese companies flood into Brazil’s offshore oil space, where some of the world’s largest discoveries have been made over the past five years.

These deals also include Sinochem’s previously acquired 40% stake in Statoil ASA’s (STO) Peregrino field for $3.07 billion, and China Petroleum & Chemical Corp. (SNP), also known as Sinopec, recently paying $5.19 billion for a 30% stake in the Brazilian unit of Portugal’s Galp Energia SGPS SA (GALP.LB) and $7 billion for a 40% share of the Brazilian arm of Spanish oil company Repsol YPF SA (REPYY).

Another choice with a more speculative bent is OGX Petroleo & Gas Participacoes SA (OGXPY). It’s the oil company controlled by Brazilian billionaire Eike Batista. Brazil’s richest man previously abandoned talks to sell stakes in his offshore oil prospects, which had drawn interest from China, because he already has billions in cash on hand.

During the second half of 2011, OGXPY focused on its OGX-26HP offshore well to the FPSO OSX-1 platform which is moored in the port of Rio de Janeiro. Now the company is looking for a January 23 date for the FPSO OSX-1 to begin production. The company signed a sales agreement with Shell in the third quarter for the first oil produced.

More cash is coming in soon for the oil producers. As the saying goes, the rich get richer…and oil is certainly a nice patch to do that from.

According to the Brazil’s oil industry regulator, ANP, these huge investments will lead to other huge opportunities to industry suppliers. The demand for goods and services could reach at least $400 billion in 2020 by their forecasts.

This will be a huge productivity-based stimulus for Brazil. Yes, Brazil’s growth is the real thing—not a fake money-printing, political ego-boosting, government budget-busting spending spree like in developed economies.

  • Petrobras will have to hire thousands of new engineers in a very short period of time, potentially straining the industry’s current labor supply. Analysts expect that, even with the expanding national oilfield service industry, Petrobras may have to lean heavily on foreign companies and labor in order to keep pace with announced plans.
  • Brazil’s infrastructure also faces challenges, as the country’s ports, airports, and roads are already straining as rising economic demand outpaces domestic infrastructure investment.
  • And that’s without even considering the impact of the upcoming 2014 World Cup and 2016 Olympics.

So you can see why I’m expecting these two Brazilian stocks to be long term winners.

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