Not financial advice, full disclaimer available here.
The chart below shows the poor performance of energy stocks in emerging markets (EM) during the last 15 years.
The chart also highlights the underperformance of EM relative to the All Country World Index (ACWI). Therefore, energy plus EM is a very cheap combo and a good place to look for value.
The next table displays the largest companies in the EM energy index:
Reliance Industries is India’s largest company. It’s also a retailer and telecom-services provider. While Reliance is growing its upstream division, refining & marketing is the primary energy business of the company today. For R&M, the main earnings driver is the refining margin — the spread between crude oil costs and petroleum product prices. So Reliance isn’t a bet on rising oil & gas prices, nor is it a pure play on energy.
Petrobras is Brazil’s integrated oil & gas firm.1 These are the most financially resilient businesses in the energy sector. In periods of high energy prices, the exploration & production division makes huge profits. Petrobras is one of the few majors to have made a large oil discovery in recent years.2 Yet, the stock trades at a big discount relative to its DM peers.
Saudi Aramco is Saudi Arabia’s national oil company, the largest of its kind. It’s the biggest and most profitable energy firm in the world. However, shares do not trade on a foreign exchange. So the easiest way to get exposure is through Saudi Arabia’s country ETF. But the weight is small (8.1%) because the float is tiny compared to Aramco’s actual market cap.3
The Chinese firms trade on the Hong Kong stock exchange. Investors usually have access to this market through western brokers. In this case, the issue is geopolitics. I am not comfortable with the risk.
PTT is a Thai company. It’s possible to buy shares through a German exchange or over-the-counter but the liquidity seems non-existent. The weight of PTT in the Thai index is 10.87%. The index has a balanced exposure to each sector, which is noteworthy. Whether or not Thailand deserves a place in investors’ portfolio is another topic.
PKN Orlen is a Polish refining & marketing firm. I like Poland but I want exposure to high oil prices, so it’s not a business I am interested in. That said, I bet the EU has lots of regulatory restrictions which prevent the expansion of refining capacity and put a moat around a state-owned company like Orlen.
Last on the list is Korea’s SK innovation, another refining & marketing firm. Again, not the most attractive industry in an energy bull market.
Stock prices are determined by supply and demand. In emerging markets, the supply of energy equities is scarce. The EM energy investment universe has a total market cap of $310bn (float adjusted).4 Over 50% of that has just been ruled out for the reasons discussed above, and the supply of stocks is not going to increase anytime soon because valuations are low.
In contrast, investment demand can change quickly. The developed markets energy index has a total market cap of $2,659bn, most of which is concentrated in integrated oil & gas firms. The only EM stock that can compete for a share of those investment dollars is Petrobras.5 It is the obvious play for energy investors looking to diversify in emerging markets.
In the top-10 table, PN stands for preferred shares (PBR.A) and ON for ordinary shares PBR 0.00%↑
Brazil’s deepwater basins are home to some of the most coveted wells internationally because of their high reserves potential.
Data for MSCI Saudi Arabia index
See index characteristics in the MSCI emerging market energy index.
Petrobras has a float adjusted market cap of $41bn, that’s less than the average stock in the world energy index (DM). Integrated oil and gas companies dominate the energy sector and have market caps in the hundreds of billions. The only EM stock that can absorb a share, even minuscule, of those investment dollars is Petrobras. I am not saying that there are no opportunities in smaller companies, outside of the MSCI top 10 reviewed in this article.
I actually own Petrobras.A.
You could have given a small remark in regards to the types of ADR available.
No mention of Ecopetrol. Thoughts?