Colombia's Ecopetrol Tops Petrobras As Biggest Latin Company

Colombia's Ecopetrol now Latin America's biggest company by market value, study says

Brazilian real's weakness, strength of Colombia's peso drives shift in values

Countries' divergent fuel-pricing policies also a key difference for investors

Colombian national oil company Ecopetrol (EC, ECOPETROL.BO, ECP.T) is now Latin America's biggest company by market value, passing Brazil's Petroleo Brasileiro SA (PBR, PETR4.BR) in a stunning shift that highlights recent foreign-exchange moves and investors' outlook for the two companies.

Ecopetrol's market capitalization, or the value of its outstanding shares, has jumped $37 billion to $127 billion this year through the close of trading tuesday, according to a study released Wednesday by Sao Paulo-based consulting group Economatica. 

Petrobras, which Economatica said had held the top spot for at least a decade, has lost $32 billion for a market value of $124 billion. 

Those levels were last seen in March 2.009 and are well off the company's May 2.008 peak at $310 billion, the study showed.

Petrobras had no comment on the results of the study.

Divergent foreign-exchange rates in the two countries explain a large part of the change, but government policies that directly affect the two oil companies have also tilted investor sentiment. 

While Petrobras shares have languished because of government interference and an inability to pass along higher oil prices to consumers, investors have rewarded Ecopetrol for Colombia's hands-off approach.

"There is very limited political interference [in Colombia]," Nathan Piper, an oil analyst at RBC Capital Markets, said in an email. 

Colombia, for example, doesn't impose the same demands for locally produced goods and services in oil exploration and production as Brazil, which boosts costs and could slow down development, Piper noted.

Economatica singled out the Brazilian real currency's recent slide against the U.S. dollar as the key factor in Petrobras's steep decline. 

The real has weakened significantly since the end of February, when the currency traded at around BRL1.70 to the greenback. 

Government measures aimed at curtailing speculative foreign investment inflows have combined with interest-rate cuts by the Brazilian Central Bank to push the real to the BRL2.00 to the dollar mark in recent days.

Colombia's peso, meanwhile, has been one of the world's best-performing currencies against the greenback in 2.012, gaining about 8% versus the dollar.

Investors have also punished Petrobras shares, which are down nearly 9% in 2.012 and 17% over the past year, because of some operational troubles that have resulted in sluggish production growth. 

Petrobras's earnings have also been undermined by a domestic fuels pricing policy that does not pass along higher international oil prices to consumers at the pump. 

The problem was exacerbated in recent quarters by the company's refining shortfall and robust domestic demand, which have forced Petrobras to increase imports of expensive gasoline and diesel fuel that the company then sells at a loss in the domestic market.

Ecopetrol, meanwhile, has become a darling of investors since the company was partially privatized in 2.007. 

Ecopetrol's shares have more than quadrupled since the initial public offering, reaching a record high of COP5,850 on May 2. 

Ecopetrol pumped a record a record 743,000 barrels a day in the first quarter and is targeting 1 million barrels a day by 2.015, although analysts say that Ecopetrol will need at least one, and possible more, big discoveries to reach its goal.

Colombia is also quicker to pass along higher international oil prices to consumers at the pump, noted an analyst at a major investment bank who declined to be named. 

"[Ecopetrol] is seen as a very healthy company from an operational standpoint," the analyst said.

Ecopetrol, however, could be overvalued, given that the company's proven reserves of about 1.8 billion barrels of oil equivalent, or BOE, pales in comparison to Petrobras's nearly 15 billion BOE.

"It's absurd," Juan Camilo Dominguez, a stock analyst at Bogotá's Corredores Asociados, said about Ecopetrol's valuation in relation to its reserves. "

The company at current levels is overpriced," said Dominguez, who has a COP5,090 price target for Ecopetrol shares.

Petrobras, which is developing some of the largest oil discoveries made in the past 30 years, currently trades at a 50% discount to net asset value, which the investment bank analyst called "excessive."

"In terms of risk-reward, I like Petrobras," the analyst said. "I think they will raise fuel prices this year."