The stock market is now in its sixth year of a strong rally. With stocks trading at historically high levels, value investors are having a hard time finding good places to invest their money. The energy sector is one of the few areas that still offers such opportunities and the two companies in this article are trading at especially appealing valuations.

Suncor Energy Inc (NYSE:SU) is a Canadian E&P (exploration and production) company targeting the Alberta tar sands (with additional production resources in the UK, Norway, and Libya). Its proven and probable reserves stand at 6.9 billion barrels, (over 30 years' worth of current production). The tar sands hold 170 billion barrels of recoverable crude oil, which makes them the third-largest oil reserves on earth. Up to now, they have been largely untapped. Suncor is working hard to change that. It is currently working on three projects to increase its production by 55%-60% through 2020 (7.6%-8.1% CAGR). 

The first of these projects is the Fort Hills mining initiative (40.8% owned by Suncor). When this project comes online in 2017, production is expected at 180,000 bpd for 50 years. 

The second and third projects are the Joslyn and Voyageur South mining projects. These are expected to produce 157,000 bpd and 120,000 bpd respectively, for an estimated 40 years. All told, these three projects will add 357,000 bpd of production to the company's 2014 guidance of 525,000 bpd to 570,000 bpd. 

What should get value and dividend growth investors excited is the company's undervaluation and dividend growth rate. Over the last 21 years Suncor has averaged a P/E of 20.4. Today it stands at just 12.9. 

On the dividend front, the company has grown dividends twelve consecutive years and has a five-year dividend growth rate of 35% CAGR. With a payout ratio of just 29%, dividend growth investors can expect continued strong growth for the foreseeable future. When combined with the current 2.3% yield, market outperformance is very likely. 

Petrobras (NYSE:PBR) is Brazil's largest oil company and has experienced a recent wave of terrible press. It has been rocked by scandals and production setbacks including:

  • Police raids on its Headquarters over possible money laundering.
  • Allegations that its former Chairman (now Brazil's president) overpaid for a Pasadena refinery by an astonishing 20 times its value.
  • Bribery charges regarding offshore oil drilling contracts.
  • A $5 billion refinery's cost ballooning to $20 billion (the highest cost/barrel in world history).
  • A contractor dropping a 2.3 km pipe into the Atlantic, setting back production on Roncador (Brazil's second largest oil field) by at least a month. 
  • Concerns over the company's $132 billion debt load and high interest rates on the $25 billion in debt it procured in the last year.

All told, the unending string of negative press has crushed the price, resulting in a P/E of 8.6 (industry average 12.1). So is Petrobras a classic dirty value play, or a value trap to be avoided? I believe the answer is dirty value and here's why.

Petrobras is currently undertaking one of largest investment programs ever attempted by an oil company, $237 billion over five years. If successful it will increase production 110% by 2020 (13.2% CAGR). The only question is, can management pull off such an endeavor? I believe it can at least come close, and the reason is offshore oil drilling. 

Petrobras is betting big on its pre-salt formations. The primary two are the Libra and Roncador fields (8 billion-12 billion barrels and 2.7 billion barrels in estimated reserves respectively). With the recent controversy and cost overruns investors might be forgiven for thinking that Petrobras's board room is a den of corrupt and incompetent fools (its board is packed with politicians after all). However, management has shown itself very competent when it comes to offshore drilling. 

In just seven years, they have reached 300,000 bpd of offshore production, which is a feat that took nine years in the North Sea and seventeen years in the Gulf of Mexico. Production in 2013 is up 37% to 412,000 bpd from just 21 wells. In 2014 alone, Petrobras plans to drill 22 wells, potentially increasing production by 550,000 bpd (133% increase in one year).

The bottom line for Petrobras is that the current price assumes continuing disasters. If management can stop the flood of bad news and achieve even a fraction of its goals (on the back of offshore drilling success), then shares should rally strongly. 

Foolish takeaway
Both Suncor and Petrobras offer unique value propositions to long-term investors. Suncor is an excellent play on Canadian tar sands (one of the world's premier, largely untapped energy resources). It is a dividend growth investor's dream stock, potentially offering double-digit dividend growth as far as the eye can see. Meanwhile, Petrobras is a classic dirty-value play on Brazil's massive offshore oil fields. If the company can manage to reach even a fraction of its production growth targets then patient investors should be richly rewarded -- both in capital gains and dividend increases. 



This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.