MJ over at Dyslexic Research asked me to research Petrobras Energia Participaciones S.A. (PZE: chart, web, Y!) in return for looking over Ingersoll-Rand.

Simply stated, Petrobras Energia focuses on oil and gas exploration and production, refining and distribution, and transmission of electricity in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, and Venezuela.

Financial Look

Looking at Petrobras financials, they seem to have a decent set of books.  Profit margin is healthy for a smaller oil and gas producer of 4.22%.  While it’s very lucrative right now to be in the oil business, smaller companies like Petrobras (as compared to Exxon, Chevron, etc) are going to have a lower profit margin due to less leverage available to control expenses.  While the majors here in the US can use their immense overhead to leverage expenses, smaller companies don’t have that luxury (alternatively they can leverage the lack of overhead to control expenses elsewhere in the field).  You can see the effects of this in the operating margin of 11% which is appropriate.

Return on assets, 4.5% and return on equity, 8.8% could be a little stronger, but are still nothing to turn up the nose about.

PZE carries a good bit of debt, $2.35 billion, and equates out a 1.05 debt to equity ratio. I’ve never been one to look at debt as a bad thing (from a business sense) but I’d like to see the debt/equity ratio a bit lower. Effectively, a ratio over 1.0 means that the companies debt outweighs the companies equity; similar to owing more for your house than it’s worth.

The P/E ratio of 15 is about right, and at the current price I really wouldn’t consider the stock overpriced or unreasonably cheap either.

Price History

Looking at a one year chart, the only thing that really sticks out is a price spike to a high of $16.29 at the beginning of 2008 that was related to the sale of a 40% equity interest in Petroquimica Cuyo S.A.I.C. to Admire Trading Company S.A. and Grupo Inversor Petroquimica S.L.

A three month shows that the stock price has closely followed the recent run up in oil ($wtic: chart) and gas ($natgas: chart) prices.

The three-month average volume is just under a half-million shares per day, which is decent and means you could probably get in and out with a thousand shares in a single trading day if you had to.  Typically I like to see volume closer to 1 million shares per day, but with the lesser known foreign-energy stocks, lower volume is to be expected.

A Future Look

What is really interesting is a recent development last month that Petrobras Brasileiro (PBR: chart, web, Y!), a parent company of  plans to order 40 drilling ships and platforms worth about $30 billion for delivery by 2017. This means the group of companies is actively going to the deep water to find oil and gas.  The downside is that the return on this investment is about 10 years down the road.  Additionally, it isn’t well understood how the acquisition will affect PZE and it’s long term outlook in deep water, although I suspect PZE will get a piece of the action.

Corner Office Thoughts

I’m not sure this is the foreign energy stock to own right now.  Effectively PZE is the PBR subsidiary for energy assets in less than stable economies of Argentina, Ecuador, Bolivia, and Columbia.  The risk is that those economies may turn to government regulation in energy markets in efforts to help prop up their own economies (much like our own Government is threatening to do).

If I had to pick between the two, I’d probably turn to PBR, the Brazilian-based oil and gas company with larger assets and more leverage to find more crude.  They’ll benefit the most from the ship and platform acquisition, and have a larger interest in Brazilian energy (which is a big advantage since the Brazilians know how to produce the stuff, but rely on ethanol for consumption).

On a scale comparison, I think the U.S. based XTO Energy (XTO: chart, web, Y!) is a better value and a more frugally run company than the foreign PZE.

Investing, Stock Thoughts foreign energy stocks, PBR, PZE, XTO