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Has the risk/reward for PBR hit an attractive level?



December 01, 2014 – Comments (12) | RELATED TICKERS: PBR

“You don’t have to know a man’s exact weight to know that he’s fat.” - Ben Graham

I know PBR is a nationalized Integrated Oil Company.  I know the price of oil has crashed and could have further to fall.  I know that there is a ton of corruption associated with this company. 

I know the company is risky - but is the investment risky?  

Shares are trading at 0.4 Price-to-Book.   

Buffett bought shares of an equally risky company back in 2002 - PetroChina.  But considering that he thought shares were undervalued by about 65%, he likely thought the investment wasn't risky.  While he bought shares when the company was trading at about $35B, he felt the company should have been valued closer to $100B. 

Let's say that PBR should be worth book value - that means shares of PBR are undervalued by about 60% - roughly the same discount that PetroChina was trading at back in 2002. 

TTM operating income is about $14B and interest expense is about $3B.  PBR has fairly high debt levels compared to US majors, but  it doesn't seem unreasonable, yet. 

Time to buy PBR shares?  

12 Comments – Post Your Own

#1) On December 01, 2014 at 2:53 PM, valunvesthere (23.13) wrote:

A map of world oil reserves, January 2014. 


At time of writing according to wikipedia List of countries by proven oil reserves  Venezuela is first and Brazil is 15th in the world by proven oil reserves.

Not to speculate, Brazil's neighbouring country is Venezuela and who knows what's underneath the northern part of Brazil.

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#2) On December 02, 2014 at 4:03 PM, ElCid16 (94.78) wrote:

As of today, PBR trading at about 37% of book value, LUKOY trading at about 47% of book value.

From what I've found, it looks like PBR has about 16B barrels in proven reserves, while LUKOY has about 13.5B.  If these numbers are correct, then from a Market Cap-to-reserves perspective, LUKOY is a bit cheaper. 

LUKOY is a notch safer than PBR from a debt perspective - PBR's debt to assets is about 35% compared to LUKOY at 10%. 10% is closer to the debt levels of US integrated companies. (CVX, XOM)

LUKOY seems to be safer from a ownership perspective, too...

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#3) On December 02, 2014 at 8:53 PM, valuemoney (< 20) wrote:

I like your recent APA pick the best on a risk/reward basis!

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#4) On December 03, 2014 at 12:13 AM, ElCid16 (94.78) wrote:

Yeah, Apache looks ok.

0.78 P/B - looks cheap for a US-based independent with low debt, but ROE has only averaged about 10% over the past 20 years.  Compare that to BP (17% ROE over past 20 years) or CVX (20% ROE over past 15 years) and it makes sense that APA trades at a bigger discount.  Relatively speaking, it should.

Including this year, APA will have had either negative earnings or single digit ROE in 10 of the past 20 years.

In the past 15 years, Chevron has returned >10% ROE every single year.  You pay 2x the multiple to book value because you get 2x the earnings power.

I guess what I'm saying is if I'm gonna go cheap with a mediocre company, I'm not going halfway with APA.  I'm going with something really cheap. PBR and LUKOY could double in market cap and still trade at a similar discount to book value as APA.

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#5) On December 03, 2014 at 1:30 AM, valuemoney (< 20) wrote:

Total Liabilities for PBR is a risk I wouldn't take on no matter what the price. Too much leverage can be the great destroyer. A homerun is good unless you strike out too much trying to hit them. PBR might not be as cheap as you think if you total up all the liabilities.... might even look expensive.

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#6) On December 03, 2014 at 10:06 AM, elcid24 (55.66) wrote:


LUKOY Liabilities/Equity = 40%

APA Liabilities/Equity = 100%

PBR Liabilities/Equity = 122% 


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#7) On December 03, 2014 at 10:17 AM, elcid24 (55.66) wrote:

Accounting for Liabilities (debt):

PBR: EV/EBIT =  9.2

APA: EV/EBIT =  6.5


LUKOY actually looks the cheapest and the safest - at least from a quantitative perspective. Damodaran likes it, too...

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#8) On December 03, 2014 at 11:57 AM, valuemoney (< 20) wrote:

I hadn't looked at LUKOY. You're right. On paper it does look pretty cheap. I looked at it for pry minutes fyi. I will give you the cheapest on that one but I don't know about the safest. 

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#9) On December 05, 2014 at 12:45 AM, valuemoney (< 20) wrote:

Jeepers now you have me looking at Russian stocks. :) added 2 more picks on my page besides LUKOY.

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#10) On December 05, 2014 at 9:48 AM, elcid24 (55.66) wrote:

CTCM looks cheap!

Here's a good Marks' quote that you'll like:

"For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can't become a bad investment if bought at too high a price. And there are few assets so bad that they can't be a good investment when bought cheap enough." 

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#11) On December 05, 2014 at 11:09 AM, valuemoney (< 20) wrote:

It is cheap but I wonder how the law will turn out and how it will work in which Putin says foreign ownership can be no more than 20%. On the media companies. I wonder if that will apply to MBT also or just CTCM.

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#12) On December 05, 2014 at 2:51 PM, ElCid16 (94.78) wrote:

Investing in a company [with no debt] trading at a 3.75x pre-tax earnings will inevitably involve uncertainty.  There's no such thing as a sure bet that trades for that cheap.

Nonetheless, I don't think it's that big of a deal...

"The new requirements of the law probably won't have a direct impact on our operations but could substantially influence the ownership structure of the business, which is owned by the U.S.-based parent company and other non-Russian shareholders,"Yuliana Slashcheva, CTC Media's general director, said in a statement released Wednesday. 

By the way, you see that Prem Watsa just added a boatload of IBM?   

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