A Top Pick in Brazil Oil and Gas -- Barron's

J.P. Morgan

In this report, we ran a scenario based analysis for the Brazilian oil and gas companies to measure the possible upside or downside to shares as result of a possible deterioration of the domestic macroeconomic scenario.

In our view, the stress test helps investor to see shares "floor value". Having this in mind, we believe Braskem (ticker: BAK) offers the best upside on a combination of Brazil real depreciation and lower naphtha [a petroleum byproduct] costs amidst weak Brent prices. We see Ultrapar Holdings ( UGP) as a resilient story and our stress scenario indicates that Petrobras's ( PBR) shares might have some downside on weakening of economic environment with lower Brent prices and weak Brazil real. Among choices, our one pick would be Braskem.

Our stress scenario considers: 1) Country risk moving up to 500 basis points; 2) the real depreciating to 2.80 per dollar; 3) Selic [overnight] rates increasing to 13%; 4) GDP decreasing 0.5% in 2015; and 5) Brent prices averaging $88 a barrel in 2015 and $90 a barrel forward.

Petrobras (rated at Neutral): Our back-of-envelope calculations suggest Petrobras shares could reach about $11 per American depositary receipt (ADR) considering a price/earnings target of 10 times for 2015. Our stress scenario considers particularly for Petrobras: 1) the exclusion of our 3% fuel price readjustment that we have in our official estimates; and 2) the exclusion of Jupiter project as net present value/barrels of oil equivalent (NPV/boe) decreases below the breakeven. All other pre-salt projects would remain, but with lower NPV/boe.

Braskem (rated at Overweight): In our view, Braskem is likely to benefit in the short term from a combination of real depreciation and lower naphtha prices amidst weak Brent prices. Our estimates are that Braskem's implied valuation would reach about $16 per ADR while our multiple-based implied valuation reaches $17 per ADR.

Ultrapar (rated at Overweight): In our view, the company's shares are yielding an implied valuation of about $19 per ADR with a limited downside to current prices. According to our simulations, the company's shares would be trading at about 20 times price/earnings multiple for 2015 -- that is a small change from historical forward multiples of 21 times. In Ultrapar's specific case, we see investors also focusing on the company's growth for next year as the stocks main trigger while Ultrapar's more defensive characteristics could yield a floor value to the company's shares.

-- Felipe Dos Santos

-- Marcos M Severine

To be considered for the Soapbox feature, please submit an original article of less than 1,000 words to [e-mail] with "Soapbox Submission" in the headline. Please include your daytime telephone number and credentials.

The opinions contained in Investors' Soapbox in no way represent those of Barrons.com or Dow Jones & Company, Inc. The opinions expressed are those of the newsletter's writer(s).

Comments? E-mail us at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires