What’s the fastest way to build wealth? Well, that depends on who you ask. Some people will tell you investing, others entrepreneurship, and others through invention. There is one surefire method that a billionaire ascribed as the best path to wealth.
To quote longtime oil man J. Paul Getty, the best way to build wealth is to:
Rise Early, Work Hard, Strike Oil!
You may not be able to plant an oil derrick in your backyard and start drilling for oil but you can invest in oil stocks. You may not have noticed but the price of crude oil has been rising over the past year. You are paying more at the pump with gas prices over $3 a gallon again.
This trend is likely to continue as global economies continue to improve and the demand for oil ratchets up. Let’s take a look at an oil stock with a lot of risk that could deliver for investors.
A Risky Oil Play
Petrobras (PBR) is trading at levels not seen since March 2009. The stock is trading at a level that is well below that of its competitors. The stock has been beaten down since September when the company sold over 2 billion shares of common stock, and 1 billion shares of preferred stock.
I will admit that the offering did dilute the equity percentages of existing shareholders but the stock still may have some value. Shares currently trade at 1.3 times book value and 1.8 times sales. This is clearly not a dividend play with its 0.5% yield. Petrobras is purely a growth investment.
Petrobras still has over $30 billion in cash on its balance sheet despite the fact that the company has been spending cash to fund its aggressive expansion plans. The company plans on spending $28 billion dollars in 2011 alone in oil and gas exploration.
Revenue growth was good increasing 14% last quarter. Earnings disappointed last quarter due to higher refining and production costs. If Petrobras can get its costs under control, the stock could catch up to its oil industry peers.
Don’t forget that Petrobras still possesses some of the richest oil fields in the world. Just today, the company discovered that two of its oilfields (Tupi and Iracema) contained 2 million more barrels in crude oil than the company originally expected.
With shares trading at just 9.5 times earnings, Petrobras is trading at a lower valuation than Exxon, Chevron, and Conoco Philips. The stock has as much upside as any large oil producer albeit with more risk as well.
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