Solid Pricing Boosting Braskem's Free Cash Flow, But A Buyout Is The Best Outcome

I thought Braskem (BAK) had so-so prospects back in the spring of 2018, as the company was likely to face tougher spreads and a wobbly Brazilian recovery but improving free cash flows. Although the local shares have done better than I expected on persistently higher prices, with the BRKM5.SA shares up almost 20%, the unsteady Brazilian situation and the resulting currency weakness have depressed the returns on the ADRs to just a bit over breakeven.

A tight U.S. polypropylene market could continue to help Braskem, and chemical spreads should remain favorable, but management has guided toward weaker utilization and demand and spreads outside of the U.S. and Mexico could be vulnerable. Braskem appears to have a little bit of upside from here as is, but the ongoing discussions between LyondellBasell (LYB) and Braskem's controlling shareholders Odebrecht are likely the best source of upside for shareholders, as a buyout in the low $30s would offer a clean outcome with a decent premium.

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Solid Pricing Boosting Braskem's Free Cash Flow, But A Buyout Is The Best Outcome

BRF SA Finally Catches A Break

"Once is happenstance. Twice is coincidence. Three times is enemy action." - Ian Fleming

Between rising costs, weakening positions in once-key markets, a scandal that has closed off the EU market, and a general sense of operational disarray, BRF SA (BRFS) has continued to struggle and has lost about half of its market value since the start of the year. At long last, though, investors finally have some good news to celebrate - the company's Chairman and former CEO of Petrobras (PBR) has been named as the new CEO.

To be clear, Mr. Parente has a lot of work ahead of him, and BRF's turnaround is not going to happen overnight. Nevertheless, I see more than a few casual similarities between Petrobras and BRF at the time Mr. Parente became CEO - both companies had unacceptable levels of inefficiency and high costs, both had serious regulatory/conduct issues, both had unfocused operations, both had issues with pricing and focus, and both had troublingly high debt. While Parente's success at Petrobras is no guarantee of a successful turnaround at BRF, I believe this was the best move available to the company and could, perhaps, represent the first few at-bats in what is likely to be a nine-inning turnaround cycle.

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BRF SA Finally Catches A Break

Despite Ongoing Operational Improvements, Cosan Still Undervalued

Following and modeling Cosan Ltd. (CZZ) is a little like training for endurance sports - you spend a lot of time while you're doing it wondering why you're bothering to do it. After all, there are two share classes, a somewhat complicated holding company structure, and many commodity moving parts to account for in an analysis. With the shares up more than 30% over the last year and close to 250% from the 2015 lows, though, I think you can certainly argue that there has been some gain for shareholders willing to take on that pain. Better still, I continue to see upside in these shares from both operational improvement and a shrinking discount to the underlying value.

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Despite Ongoing Operational Improvements, Cosan Still Undervalued

Painfully Complex, Cosan Remains An Undervalued Play On Brazil

As I have written before, U.S. investors are not exactly spoiled for choice when it comes to Brazilian investments. Cosan Ltd. (NYSE:CZZ) has a lot to offer, including exposure to multiple major long-term opportunities within Brazil's economy, but the holding company structure is complicated and this is a difficult company to track and model. Still, with a holding company discount rate in excess of 30%, relatively healthy underlying fundamentals for the sugar, ethanol, and retail fuel businesses, and good long-term prospects in the rail business, this is worth a look.

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Painfully Complex, Cosan Remains An Undervalued Play On Brazil

Healthy Spreads And Steady Operations Helping Braskem

Brazilian shares have had a good run since the spring, and Braskem (NYSE:BAK) has gone along for the ride with the shares climbing another third since my last piece, taking the shares up 70% over the past year. Brazil's economy is still in tough shape, but weak oil prices and healthy international demand for polyethylene and polypropylene have kept the company's financials in good shape.

There are a lot of unknowns that investors have to make their peace with if they're going to own Braskem. The company announced earlier this month that they were having settlement discussions with the U.S. Department of Justice and the SEC regarding the company's involvement in a widespread bribery and corruption probe in Brazil, but the magnitude of any settlement (in the U.S. and Brazil) is still unknown.

What's more, Brazil's economy seems to be stabilizing, but the path of the recovery is uncertain and Braskem's chemicals are tied to demand for fundamental products like construction materials, appliances, cars, packaged foods and so on. In addition to all of that, there is the regular unpredictably of the currency markets, energy markets, and basic chemical markets.

I believe Braskem is still undervalued on an EV/EBITDA basis, but it's a more challenging call. Braskem should benefit from increased production in Mexico, healthy fundamentals in the U.S., and the Brazilian recovery, but basic chemical companies don't often lend themselves to being long-term buy-and-hold stocks.

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Healthy Spreads And Steady Operations Helping Braskem

Cosan Buoyed By Better Operating Results And Optimism On Brazil

If you really hate your brain and want to punish it, dig deep into Cosan Ltd (NYSE:CZZ). While this Brazilian-American conglomerate has a lot of positives going for it, including a strong position in ethanol and sugar production, fuel distribution, and rail in Brazil, it also has a complex holding company structure, a lot of debt, and a lot of moving parts to factor into any sort of valuation analysis.

My last update on Cosan took place right around the period of peak pessimism on Brazil, with both the stock market and currency around five-year lows. Since then, not only has Cosan seen stronger markets for ethanol and sugar, but more optimism about a recovery in Brazil and a stronger currency. The shares have soared more than 100% since my last update and yet I still think there could be upside left.

Adjusting for the company's capex plans, the recapitalization of Rumo, and the exchange rate, my fair value rises to around $11, suggesting meaningful upside is still possible. Keep in mind, though, that what the currency markets give they can also take back and Cosan is a high-beta play on Brazil, not to mention a complicated company in its own right.

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Cosan Buoyed By Better Operating Results And Optimism On Brazil

Adecoagro's Valuation Looks A Little Too Sour

When I last wrote about Adecoagro (NYSE:AGRO), I thought the company was in place to benefit from an improved political and economic situation in Argentina and its low-cost position in ethanol in Brazil, but I thought the valuation was less than compelling, and particularly next to Cosan (NYSE:CZZ) and SLC Agricola (OTCPK:SLCJY). Since that last article, Adecoagro shares have basically been flat while Cosan has soared, SLC Agricola has gone up a bit (around 16%), and another Argentine farming/farmland play, Cresud (NASDAQ:CRESY), has been quite strong.

At this point, I'm more bullish on Adecoagro again. While low global grain prices are a concern, prices have been quite healthy in the sugar and ethanol business. What's more, the company continues to periodically sell farmland well in excess of appraised value, and the economic reforms underway in Argentina make further appreciation a credible driver. With a fair value around $13.50 to $14.50, Adecoagro isn't shockingly cheap, but I think it is worth the elevated level of risk that goes with an emerging market commodity play.

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Adecoagro's Valuation Looks A Little Too Sour

Seeking Alpha: Braskem Doing Well Despite Brazil's Problems

Finally - a Brazilian stock I can look back on and not feel bad about. Although Braskem (NYSE:BAK) shares have come down hard from a recent top (down almost 20% from a week ago), the shares are nevertheless up about 40% since my last review of the company. Brazilian shares have perked up since mid-January, but Braskem has done quite a bit better than Brazilian shares in general since June, as the company has benefited from lower feedstock prices and the opportunity to leverage a weaker Brazilian currency by importing Brazilian-produced chemicals into the U.S..

Management expects spreads to tighten up in 2016, and Brazil's economy remains weak, but low oil prices are still working in the company's favor. The addition of the company's Mexican plant should boost growth and Braskem seems to be looking toward a period of solid returns on assets (solid, at least, for a chemical producer). Valuation is difficult, as the shares don't look very cheap on a long-term FCF basis but do still seem undervalued on EV/EBITDA, while the role of the company in a widespread corruption scandal centered on Petrobras (NYSE:PBR) remains unknown.

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Braskem Doing Well Despite Brazil's Problems

Seeking Alpha: Braskem Not Fully Broken

Trying to find value in the Brazilian industrial commodities sector has been an unrewarding task over the past year. Companies like Gerdau (NYSE:GGB) and Braskem (NYSE:BAK) have shown me no love at all, as the combination of economic malaise and currency erosion has weighed heavily on the value of these ADRs. In the case of Braskem, there are additional worries tied to the company's naptha supply arrangement with Petrobras (NYSE:PBR), global polyolefin spreads, and potential changes in the tax regime in Brazil.

The nearly one-third decline in Braskem's share price since my last update is almost enough to tempt me to erase the company from my spreadsheets and take a vow of silence on the stock. Brazil probably has not yet reached its point of maximum economic pain and there are legitimate concerns regarding the company's cost structure under the new Petrobras agreement. That said, the shares are trading at 4.5 times the average sell-side EBITDA forecast over the next 12 months and that seems punitive relative to the company's leverage to an eventual recovery in Brazil and its increasing diversification into natural gas as a feedstock.

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Braskem Not Fully Broken

Seeking Alpha: Braskem Hamstrung By Brazil's Industrial Malaise

Continuing my run through Brazilian commodity companies that have had disappointing results this year, I come to Braskem (NYSE:BAK) - Brazil's large polyolefin and PVC producer. Like the steel companies Gerdau (NYSE:GGB) and CSN (NYSE:SID), Braskem has underperformed in the face of weakening domestic demand and fears that the Brazilian national election could bring in a government less supportive of the structural barriers that allow them to charge higher prices in Brazil.

I liked Braskem six months ago and I still believe the shares are undervalued. Even amidst an underwhelming domestic market, the general expectation is that Braskem will still see year-on-year EBITDA growth in the high single-digits for 2014 and double-digit growth in 2015. What's more, I think Braskem is looking at a window of opportunity (before major cracker project start-ups in the U.S.) where its naptha-based production can still be quite profitable. There's a not-so-fine line between being patient and being wrong, though, and these shares could still disappoint further.

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Braskem Hamstrung By Brazil's Industrial Malaise

Seeking Alpha: Can Petrobras Unlock The Underlying Value In Its Reserves?

In a world where investors are increasingly focused on the production growth prospects of major integrated energy companies and their leverage to oil, Petrobras (PBR) ought to be a popular name. Few companies of comparable size have added more to reserves over the past decade and most sell-side production forecasts for Petrobras are nearly double that of other multinationals like ExxonMobil (XOM), BP (BP), or Chevron (CVX).

Unfortunately, there are a lot of challenges offsetting Petrobras's leverage to huge oil-heavy reserves. The company has established a record of missing production guidance and production costs are increasing. Even more troubling is a systemically troubled refining operation and a government that is all too willing to take a big role in the company's operations. Despite that, the company looks undervalued enough on near-term earnings prospects to be worth a look and could double from here if the company can maximize its upstream value and stem the losses downstream.

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Can Petrobras Unlock The Underlying Value In Its Reserves?

Seeking Alpha: Cosan's Value Is Worth The Hassle

I would imagine that those investors tending towards the OCD side of the spectrum who look into Cosan Ltd. (CZZ) will eventually have wisps of smoke coming out of their ears. Not only does Cosan Ltd. have a convoluted ownership structure (Cosan Ltd. technically owns about 62% of Cosan SA (CSAN3), and Chairman Ometto owns more than 40% of Cosan Ltd.), but the basic business of Cosan is confusing as well with its mix of JVs and wholly-owned operations.

What I believe is a lot simpler to understand is the value proposition. Although Cosan Ltd. routinely trades at a discount of 15% to 20% of the implied value of its Cosan SA position, Cosan Ltd. is the one that most U.S. investors can own and Cosan Ltd. shares themselves appear to be about 30% undervalued. Cosan is vulnerable to Brazil's opaque regulatory policies in multiple ways and Cosan Ltd. is vulnerable to currency moves, but I believe there is significant value in a company that is Brazil's largest sugar and ethanol producer and a significant player in fuel distribution (gas stations), natural gas distribution, and commodity logistics.

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Cosan's Value Is Worth The Hassle

Investopedia: New Gas Prices Help PetroChina, But Multiple Challenges Remain

Not unlike Petrobras (NYSE:PBR), PetroChina (NYSE:PTR) finds itself continually put into losing situations by its government. The Chinese government controls the prices at which PetroChina can sell natural gas and refined products like diesel, but cannot control the global cost of crude, nor the cost of producing oil, gas, and refined products. Couple that with aging fields, rising prices, and lower returns on capital, and PetroChina is in a difficult position.

Although that's a serious backdrop for the company, it's one in which management has always operated, and generally operated pretty well. Although aging fields in China are a concern, the company has been expanding its overseas production options and the development of shale and other unconventional resources in China could offer production growth. All told, PetroChina looks a little too cheap today and offers decent capital appreciation potential and a solid dividend.

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Investopedia: Petrobras Will Grow, But Will It Be Profitable Growth?

For the most part, investing in one of the international oil and gas majors these days is about a trade-off between a fairly predictable stream of dividends and share buybacks and sluggish production growth. Well-known companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and Royal Dutch Shell (NYSE:RDS.A) will, for the most part, consider themselves lucky if they grow production much more than 3% or 4% a year over the next decade.

On the flip side of that equation is Petrobras (NYSE:PBR). With its privileged access to Brazil's huge offshore pre-salt deposits, Petrobras could lead the world's major energy companies with 10% annual production growth over the next decade. But while Petrobras is highly likely to deliver high levels of production growth, Petrobras doesn't enjoy the same reputation as Exxon Mobil or Chevron in per-barrel profitability or returns on capital. What's more, the ongoing interference of the Brazilian government looms over the stock. All of that said, it looks like investors are too worried about the bad things that could happen relative to the good things that probably will happen – setting these shares up as a potentially significant bargain in the space.

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Investopedia: Good Profitability And Relative Valuation Make Chevron Interesting

If Exxon Mobil (NYSE:XOM) had the wrong kind of earnings beat, it would seem that Chevron (NYSE:CVX) had the right sort of miss. More to the point, Chevron continues to operate one of the most profitable upstream businesses among the oil majors, and the company has a rich pipeline of growth projects to maintain higher production levels across the next five years. Coupled with an undemanding valuation, Chevron looks like a solid name to consider for broad international energy exposure.

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http://www.investopedia.com/stock-analysis/042613/good-profitability-and-relative-valuation-make-chevron-interesting-cvx-xom-cop-bp.aspx

Commodity HQ: 5 Of The Biggest Oil Finds In History

Oil makes the world go ’round, and finding more oil is one of the principal goals of multinational energy giants like Exxon Mobil (XOM), British Petroleum (BP) and Chevron (CVX). Unfortunately, it has become harder and harder to find fields that really move the needle for corporate or national reserve totals. Nevertheless, just because it is difficult does not mean it is impossible, and investors can look back to some notable successes in the history of the oil industry.

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5 Of The Biggest Oil Finds In History

Commodity HQ: A Deeper Look At Iran's Commodity Industry

Iran is quite possibly one of the best-known and least-known countries in the world for American investors. Tense, if not outright hostile, relations between Iran and many Western countries have kept it in the news, but relatively few investors seem to appreciate Iran’s size, demographics (it’s a very young country), and economic prospects. In recent years sanctions have had a massive impact on Iran’s economy, but it remains a major player within OPEC and in the global energy market.

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A Deeper Look At Iran's Commodity Industry

Commodity HQ: Stocks To Buy For Hyperinflation

With the Federal Reserve firing up the presses for a third round of quantitative easing, it’s only a matter of time before more talk of imminent hyperinflation pops up. While calm discussions on the prospects of hyperinflation are rare (and there’s often a tinge of hysteria or paranoia around the topic), the reality is that the U.S. does have some disturbing trends working against it in terms of demographics, debt/deficits, and a policy of easy money that debases the fiat currency.



What’s more, thumbing through the history books shows that periods of extreme inflation or hyperinflation (definitions vary) are not all that uncommon around the world. Post-World War I Germany is probably the most oft-cited example, but a range of countries including Greece, Russia, Argentina, China, Brazil, and Zimbabwe (most recently) have seen stretches of inflation severe enough to call it hyperinflation.

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http://commodityhq.com/2012/how-to-prepare-yourself-for-hyperinflation/

Investopedia: The Market Is Already Expecting Big Things At Dril-Quip

There's ample business to come in offshore energy development, what with the huge discoveries of oil and gas in the waters off Brazil, and both East and West African countries. The question, however, is how much of that is already reflected in the valuation of equipment companies such as National Oilwell Varco (NYSE:NOV), Aker Solutions (OTC:AKKVF) and Dril-Quip (NYSE:DRQ). In the case of the latter, it looks like quite a lot.

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Seeking Alpha: Is Chevron Following The Exxon Game Plan?

Investors have ample choice in the oil and gas sector these days, with plenty of high-quality names like Apache (APA) and Petrobras (PBR) trading at discounts for one reason or another. Add Chevron (CVX) to that list, for while it's not the cheapest energy stock out (nor the cheapest major), the company's valuation seems to give it only marginal credit for following a game plan that looks more than passingly similar to the one successfully put into place at Exxon Mobil (XOM).

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Is Chevron Following The Exxon Game Plan?