Brazil oil company Petrobras (NYSE:PBR) will spend $225 billion by the end of 2015 on exploration projects, most off the coast of Brazil. Its management believes it can finance the capital expenditures through operating cash flow and debt. It's an incredible amount of activity that will help Petrobras continue to grow. As of September 20, its stock is down 35% this past year, which is among some of the worst performers in the oil exploration industry. One of the better performers in the past 52 weeks is Norway's Statoil (NYSE:STO), up 1%. Investors clearly feel Statoil is the better stock to own. I'll examine whether they may be right.
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According to a Statoil company presentation, it intends to be producing in excess of 2.5 million barrels of oil equivalent per day by 2020. Petrobras, according to its new five-year plan, will be at 6.4 million barrels of oil equivalent per day by that time. Sheer numbers would suggest that Petrobras is now a bigger player in the oil industry and will be bigger in the future. This doesn't necessarily make it a better stock. In addition to the revenue side of the equation, one must also take into account profitability and return on investment. According to an April 5 report by Goldman Sachs (NYSE:GS), Statoil's profitability per barrel of oil equivalent is $4.70 compared to an industry average of $3.60. In addition, Statoil makes $7.40 in capital expenditures per barrel of oil equivalent compared to $7.50 for the industry as a whole. It spends less to make more. On this basis at least, it's every bit Petrobras' equal.
Second Quarter Results
Thanks to rising oil and gas prices, increasing 32 and 28% year-over-year, respectively, Statoil's revenues in the quarter jumped 30.3% to $31.3 billion producing a net operating profit of $11.3 billion. Petrobras saw revenues increase 23.8% to $70.8 billion with a net operating profit of $14.4 billion. In terms of operating margins, Statoil ruled the day at 36.1% compared to 20.3% for Petrobras. That's a substantial victory. For every dollar of revenue that each company generated in the quarter, Statoil made 16 cents more. Put another way, Statoil spent $6.7 billion in the quarter on property, plant and equipment to generate $11.3 billion in net operating profits. Petrobras meanwhile spent $19.7 billion to generate a net operating profit of $14.4 billion. Petrobras invested $1 to make 73 cents while the same dollar invested by Statoil delivered $1.69 in profit or 2.3 times its Brazilian counterpart. Clearly, Petrobras is counting on the $225 billion investment over the next five years boosting profitability. I'm not so sure.
As always, it comes down to price. I believe I've made a reasonable argument that Statoil is a more efficient oil producer. However, just because it makes more money as a percentage of revenue, doesn't mean it's a better stock. Value investors will never have a problem buying the lower margin stock if they feel it's available at a superior price. Petrobras' enterprise value is 5.6 times EBITDA compared to 2 times EBITDA for Statoil, 3.9 for ConocoPhillips (NYSE:COP), 5.5 for Exxon Mobil (NYSE:XOM) and Royal Dutch Shell at 4.6 times EBITDA. None is more expensive by this metric and Statoil is the cheapest. Some other valuation metrics such as price-to-sales and price-to-book are a draw, so, for me, it comes down to the fact that Statoil pays a dividend yielding 4.2%, which is alot higher than Petrobras pays. (For additional reading, take a look at A Guide To Investing In Oil Markets.)
The Bottom Line
Add it all up and I have to agree with investors. Petrobras likely has a good future but Statoil is the better stock to own.
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