As of Monday's close, Colombian oil company Ecopetrol (
once again has a larger market cap
than Brazilian giant Petrobras (
). Do current market prices for these equities reflect their true
[caption id="attachment_57545" align="alignright" width="300"
caption="Ecopetrol's market cap is now larger than Petrobras"]
With Ecopetrol's 25% gain over the past year, the Colombian firm
has substantially outperformed its Brazilian counterpart. Petrobras
lost almost 40% of its market capitalization over this period.
Both companies produce the same commodity as a principle source
of income, and Petrobras has roughly three times the revenue of
Ecopetrol -- so what could explain this stark divergence in
The primary explanation is the role of the companies' respective
state governments. While the Colombian government has placed an
emphasis on building a business-friendly regime with minimal
government interference, the Brazilian government under Dilma
Rousseff has concentrated on inequality reduction, often at the
expense of big business.
During the Rousseff administration, Brazilian companies
have seen a substantial increase in government interference.
Petrobras is required to sell certain quantities of domestic fuel
and forced to pay additional taxes. Other Brazilian firms like
) and Itaú Unibanco (
) have suffered a drop in share price thanks to similar
On the other hand, the concerted effort made by the Colombian
government to create a healthy market has been rewarded by
investors; some pundits argue that Ecopetrol's 50% rise over the
past 15 months has as much to do with the fundamentals of the
Colombian economy as it does the company itself.
Because of the limited size of the Colombian exchange (
), retail investors and pension funds have a limited number of
companies from which to choose, whereas Brazil's Bovespa (
) is a more developed stock market with a more diversified crop of
large-cap, dividend-paying stocks.
As a result, Ecopetrol's valuation may be somewhat stretched at
these levels. While the stock could have a bit more upside,
especially if the underlying price of crude
rises, EC's run could be close to an end.
On the other hand, Petrobras remains at dirt-cheap valuations --
with good reason. The government has shown little sign of relenting
on its current policies. However, investors with a very long-term
horizon who believe Rousseff will eventually give the company more
free reign could be rewarded for their patience.
Disclosure: Author's family is long EWZ and VALE