A recent upgrade for the Brazilian oil company confirms the improving capital expenditure story for this massive stock, one of the biggest in Latin America.
UBS rated Petrobras (PBR) a “buy” after the company promised that it will only spend $225 billion through 2015 on new projects.
The company promised to use operational cash flow and not debt to fund the spending.
This confirms our suspicion that Petrobras would be scaling back on all but its highest-return exploration and production prospects.
As it is, Petrobras has been de-rated in the markets, having underperformed Brazil over most of this year.
Investors have been fleeing the stock, but higher oil prices will make a lot of their reserves more feasible to drill and develop.
PBR has been a good dog with fleas, essentially. Now, maybe it will just be a good dog — maybe even a purebred — that is undervalued in a world where oil prices can climb to $130 a barrel.
The stock is getting a minor lift today, but with PBR shares down 10% year to date, there is still plenty of room to play the emerging change in sentiment.
And remember: as PBR goes, the Brazilian market cannot help but follow.
A turnaround for PBR means a turnaround for EWZ and other Brazilian large-cap ETFs: