Petróleo Brasileiro S.A.,–Petrobras (PBR), is a Brazilian oil and gas refinery and transportation company that operates through four segments—exploration and production; refining; transportation and marketing; gas and power; and corporate and other businesses. PJSC LUKOIL (LUKOY) is a Russian oil and gas exploration and distribution company. It operates in approximately 19 countries through two segments: exploration and production; and refining, marketing and distribution.

On June 4, oil prices surged to hit their 2-year high at $72 per barrel as OPEC and OPEC+ countries agreed to keep their supply cuts in place. The global economic recovery, impressive job growth in the United States, and declining COVID-19 cases in India have led to a steady rise in oil prices over the past few days. Goldman Sachs energy research analysts expect oil prices to rise further if a nuclear agreement is reached between the United States and Iran, owing to an anticipated bullish repricing of the commodity. As the international oil markets gain momentum on the back of rapid economic recovery, both PBR and LUKOY are expected to perform well in the coming months.

Brazil’s higher-than-expected GDP growth in the first quarter helped the country to recover its pre-pandemic levels, in turn raising the domestic demand for oil. Russia’s LUKOY, in comparison, is expected to grow substantially due to rising oil prices.

PBR has gained 23% over the past year, while LUKOY returned 12.6%. Also, PBR’s 26% gain over the past month is significantly higher than LUKOY’s 8.3% returns. However, in terms of year-to-date performance, LUKOY is the clear winner with 30.4% gains versus PBR’s marginal returns.

So, which stock is a better buy now? Let’s find out.

Latest Developments

On June 2, PBR announced a U.S.-dollar- denominated global notes offering in the international capital markets. The company plans to use the proceeds of the offering to redeem outstanding notes. Given the near-zero benchmark interest rates, the debt restructuring should help PBR reduce its interest burden substantially.

LUKOY has been forging several collaborative agreements to expand its operations overseas. On June 4, the company acquired a 49.99% stake in the Al-Farabi offshore project in Kazakhstan. LUKOY’s revenues should rise substantially through this acquisition. Also, on June 3, LUKOY signed a memorandum of cooperation with energy technology company Baker Hughes Lorenzo Simonelli. The agreement should allow LUKOY to develop strategies for implementing its low-carbon technologies. LUKOY signed a similar agreement with Rosatom, under which both parties will work on renewable energy and environment friendly technologies.

Recent Financial Results

LUKOY’s revenues increased 12.6% year-over-year to ₽1.88 trillion ($25.80 billion) in the first quarter, ended March 31. Its operating income came in at ₽200.67 billion ($2.75 billion), up 400% from the same period last year. Its profit for the period and EPS stood at ₽157.70 billion ($2.16 billion) and ₽230.69, respectively, representing substantial improvements from negative year-ago values.

PBR’s revenues declined 8.2% year-over-year to $15.70 billion in the first quarter ended March 31. Its gross profit rose 10.2% from the same period last year to $8 billion, while its adjusted EBITDA improved 3.8% from the year-ago value to $8.91 billion. Its recurring consolidated net income came in at $231 million, representing a substantial improvement from the negative year-ago value. The rise in net profits can be attributed to a 21.2% rise in Brent crude oil prices.

Past and Expected Financial Performance

PBR’s revenues declined at a 4.1% CAGR over the past three years, while LUKOY’s revenues increased marginally over this period. PBR’s total assets increased at a 6.6% CAGR over the past three years, while its tangible book value declined at a 3.7% rate over this period. In comparison, LUKOY’s total assets and tangible book value increased at CAGRs 7% and 6.3%, respectively, over the past three years.

Analysts expect LUKOY’s revenues to rise 39.8% year-over-year to $106.56 billion for the fiscal year ending December 2021. The company’s revenues are expected to rise marginally next year to $106.79 billion.

In comparison, the Street expects PBR’s revenues to rise 44.3% and 1.7%, respectively, year-over-year to $76.01 billion and $77.31 billion in fiscal 2021 and 2022.

Profitability

LUKOY’s trailing-12-month revenue is 1.72 times PBR’s. However, PBR is more profitable, with a gross profit margin and net income margin of 55% and 22.91%, respectively, compared to LUKOY’s 29.19% and 3.82%.

Furthermore, PBR’s ROE, ROA and ROTC of 20.62%, 5.74% and 7.94%, respectively, compare with LUKOY’s 5.07%, 3.89% and 4.84%.

Thus, PBR is more profitable.

Valuation

In terms of forward EV/Sales, LUKOY is currently trading at 0.57x, which is 69.5% higher than PBR, which is currently trading at 1.87x. However, LUKOY’s 3.98 forward EV/EBITDA ratio is slightly higher than PBR’s 3.82.

POWR Ratings

LUKOY has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. PBR, in contrast, has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

LUKOY has a B grade for Sentiment, in sync with the company’s revenue growth estimates. But PBR has a D grade for Sentiment. This is justified because analysts expect the company’s EPS to decline at a rate of 17.6% per annum over the next five years.

LUKOY has a B grade for Growth, which is consistent with its stable rise in financials over the past couple of years. PBR has a C Growth grade, consistent with the company’s mixed financial performance.

Of the 51 stocks in the B-rated Foreign Oil & Gas industry, LUKOY is ranked #1 while PBR is ranked #27.

Beyond what we’ve stated above, we have also rated both the stocks for Stability, Momentum, Value and Quality. Click here to view PBR Ratings. Get all LUKOY ratings here.

The Winner

The demand for oil is rising rapidly as emerging markets such as Brazil and India recover from the COVID-19 spikes. Furthermore, Chinese oil imports are expected to increase in the near term following a temporary decline last month. Because the global oil markets anticipate a robust recovery over the next few weeks, PBR and LUKOY are expected to grow substantially. However, we think PBR’s relatively weak growth prospects owing to a potential third COVID-19 wave in Brazil make its competitor LUKOY the better buy now.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Foreign Oil & Gas industry here. 

PBR shares were trading at $11.65 per share on Tuesday afternoon, up $0.22 (+1.92%). Year-to-date, PBR has gained 7.34%, versus a 13.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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