Year In Review: South American Energy
Year In Review: South American Energy
Petrobras, Ecopetrol, and Frontera: Looking At The Last Year For The South American Energy Basket
Year In Review
Yesterday, I talked about some changes coming in the near future for Kontrarian Korner. I’m excited about the way things have gone over the first year and I’m looking forward to year two. This week, I will be doing a breakdown of what happened with the portfolio and how each stock performed. Today, I will be leading off with a look at the South American energy basket.
Petrobras PBR 0.00%↑ was the big winner in the basket, and a huge driver for the portfolio, with a total return approaching 100% since buying preferred shares last spring. Despite the huge run over the last year, I still think the risk/reward on Petrobras is skewed to the upside. Ecopetrol EC 0.00%↑, which is no longer in the portfolio, was another winner, but not nearly to the same magnitude as Petrobras. Frontera Energy, which is a much smaller position in the portfolio, is the only loser in the basket. I’m waiting to see how their offshore block in Guyana plays out, but shares are still cheap based on their existing assets.
Petrobras
Because Petrobras is a large position in my portfolio, it has been one of the main drivers of the portfolio performance over the last year. I bought my position last March and April in the preferred shares (PBR.A or PBR/A), which were trading at a pretty wide discount to the common shares, despite the equal dividend payout. That gap has narrowed a bit since then. While the share price performance over the last year has been impressive, shares are still cheap and I think we have a long way to go to get to fair value.
I wasn’t sure how it would turn out, but the valuation was so cheap, and the dividend so large that I thought there was a pretty wide margin of safety. The uncertainty was why Petrobras was so cheap, and my assessment that the political risk was overblown has turned out to be correct so far. It’s certainly something I will be monitoring moving forward, but I will have a hard time selling if the dividends keep flowing.
We had some recent uncertainty around the dividend over the last couple months, but they have decided to payout 50% ($0.68 per share) of the special dividend with the upcoming regular dividend. From my understanding, they will pay out the remaining 50% of the special dividend over the rest of 2024, but we will have to wait and see to be sure. I think that as long as oil is in the $70 to $90 range, Petrobras’ regular quarterly payout will probably be in the $0.40 to $0.50 range.
If you told me a year ago that Petrobras shares would be up 65% while sending back more than 40% of cost basis by the middle of 2024, I would say sign me up. I don’t see a repeat of that over the next 12 months, but I would love to be proven wrong. I still think we are in a commodities cycle, and you would be hard pressed to find an oil major that fits in with the offshore thesis better than Petrobras. Owning Petrobras comes with some political risk, but if the government doesn’t try to kill the golden goose, I think Petrobras will be the best performing oil major over the next three to five years.
Average Cost Basis: $9.43
Dividends received: $2.98 per share
Dividends on the way: $1.11 per share
Current Price: $15.65
Total Return through 5/5 (does not include upcoming dividends): 98%
Ecopetrol
This was my other pick among larger South American energy producers. It was a winner, but not nearly on the same scale as Petrobras. I was buying my shares last year from March to April, and I sold my shares this year in February and March. I was very bullish on Ecopetrol last year, and it was a large position before selling. Over time, I changed my opinion on Ecopetrol. In hindsight, I should have just bought Petrobras (not just because the share price has done better), because it’s a better business with better assets in my opinion, and the valuation was similar.
Ecopetrol is still cheap and it still pays a double digit yield. I just found other opportunities more attractive. To be perfectly honest, I had pretty poor timing selling Ecopetrol to buy Borr Drilling BORR 0.00%↑. I still find the risk/reward to be much more attractive for Borr, which is why I made the trade. Next time I will try to be a bit slower when I’m making these trades (or any trades to be honest), but one of the things I still need to work on is finding better short-term buying and selling points.
The dividend this year isn’t as large as it was last year, and I didn’t think it made sense to hold onto shares this year with the smaller dividend and better risk/reward elsewhere. I still think shares are undervalued, but the decision to sell came down to opportunity cost. We will see how the decision to sell Ecopetrol and reinvest elsewhere plays out over the next couple years, but I can’t complain about the total return on the investment.
Average Cost Basis: $10.87
Dividends received: $2.81 per share
Average Sale Price: $10.84
Total Return: 26%
Frontera Energy
Frontera Energy is the only loser in the South American energy basket, at least for now. Like the other two stocks in the basket, I was buying in March and April of last year. It is more speculative than the other two stocks, which is why I made it a smaller position. Frontera is still dirt cheap even based on their existing assets, but the real reason I bought shares was the offshore block in Guyana. If it’s anything like Exxon’s XOM 0.00%↑ neighboring Stabroek Block, shares are still very undervalued.
It has started to pay a small dividend and started buying back shares recently. If the dividend stays at the current level, the forward yield is 2.6%. They actually report earnings this week on Wednesday, so we should get an update on the capital returns program soon. It’s been a frustrating stock to own over the last year, but the Corentyne Block is a potential catalyst. I don’t know if/when that could come to fruition, but if we see a larger company buy a piece of the block, I expect shares to go much higher. I won’t wait around forever, but I’ll be giving Frontera more time as long as the valuation stays cheap and they continue to buy back shares and pay dividends.
Average Cost Basis: $9.01
Dividends received: $0.045 per share
Current Price: $6.84
Total Return through 5/5: -24%
Conclusion
Overall, the South American energy companies have been good to me over the last year. Petrobras is the main reason for that, but Ecopetrol was a decent trade as well. Petrobras shares probably won’t have a repeat performance of the last year unless oil shoots the moon, but I have no problem getting 4-5% of my cost basis back each quarter in dividends.
Based on the valuation, we still have a long way to go to get to fair value, and I’ll wait patiently as long as I’m getting paid to wait. Frontera has been a laggard, but I’m not going to cut my losses on that one just yet. Unless something better comes along, I want to see how their offshore block turns out and the valuation is still cheap. Tomorrow, I’ll be going through the same process with the coal basket, so keep an eye out for that post tomorrow morning.
Disclaimer
I own shares of Petrobras (PBR.A shares) and Frontera Energy. I no longer own Ecopetrol. You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.