The sell-off in oil from its high of nearly $150 a barrel has been well publicized and many energy stocks that rode that wave up are now reeling as the price of oil plunges. Petroleo Brasileiro S.A. (PBR)—the state-controlled energy company of Brazil commonly referred to as Petrobras—is one such stock that reached levels that we view as overvalued (see ratings chart). However, after dropping more than 30% from its recent high in little more than 3 months, we have upgraded Petrobras to a Buy rating as of this week. Value investors should be moving in as the speculators sell. While the rapid drop in price may scare some investors, we believe the there is significant value in these shares for long term investors.

Petrobras could be sitting on one of the largest oil fields discovered in years in the Tupi-area fields. Estimates for the Tupi field reserves range from 5 billion to 8 billion barrels (85% light crude) and that would undoubtedly provide a healthy revenue stream for years to come. Interestingly, PBR has put a 12 to 18 month hold on drilling those fields while they conduct seismic and other various well tests. Perhaps they are also buying time to acquire rigs and raise the capital to operate them. The reserves in Tupi would require deep water rigs, which are not cheap to operate. The company plans to spend more than $200 billion to produce the crude. Petrobras has moved quickly to lease many of the deepest offshore rigs (source). With the price of oil in constant flux, there is no way to accurately predict what the earnings will be from this field, but we believe that it is reasonable to assume that oil will not drop markedly below $100 a barrel for any sustainable period of time and certainly could go far higher.

In addition to the much ballyhooed Tupi field, Petrobras has made other, albeit smaller discoveries. Earlier this month Petrobras began drilling in the Jubarte field in the Campos Basin with production potential of around 18,000 barrels per day. Also, they are eagerly exploring other potential off-shore sites hoping to find the next Tupi. PBR has partnered with some of the biggest American (XOM, HESS) and international (REP, RDS.A) energy companies to leverage their experience and expertise. In a short time, Brazil has quickly become a major player in oil and gas exploration.

Most of the blame for the sell-off in PBR shares is correctly attributed to the decline in crude oil prices. However, recently the stability of the company has been called into question as there are grumblings about a possible nationalization of PBR. The Brazilian government already holds a majority stake of PBR and has talked about increasing its stake in the company. There have been threats of oil workers strikes and other signs of unrest coming from Brazil. This is clearly a cause for concern for investors—and the company—but up to this point, PBR has affirmed that it will honor all existing contracts.

Returning to the stock’s valuation, as we mentioned before, it looks far more compelling than at any other period since we initiated coverage of PBR. The company is coming off of a tremendous, record-breaking second quarter. We particularly like the growth of revenues, which climbed more than 30% in the quarter over a year ago. Over the longer term, revenue has grown 220% over levels seen five years ago without even a drop coming from Tupi. At current price levels, PBR is selling within its normal price-to-sales and price-to-cash ranges, after trading far above their historically normal range for some time. We see this as an interesting growth stock to add to an international portfolio, especially for those that believe the price of oil will eventually be heading higher in the future.