It may finally be time for investors to grab a PBR. And no I’m not talking about the hipster beer of choice. I’m talking about one of the largest foreign integrated energy stocks — Brazil’s Petrobras (PBR).
After years of disappointment among the world’s largest energy stocks, PBR — along with sister shares PBR.A — have now sunk down to historical lows. A combination of factors have made PBR stock one of the worst-performing emerging market and energy stocks out there.
While the drop due to many of these factors is potentially justified, its most recent drop has given investors an opportunity to score some of the world’s largest oil and gas reserves on the cheap.
And given our continuing thirst for oil and natural gas, they may want to do that before it’s too late.
A Host Of Woes
The story for Petrobras and PBR stock hasn’t been so rosy since the credit crisis. PBR stock — which topped out around $77 before the crisis — has basically sunk like a stone since the bubble popped in 2009. Unfortunately, unlike many other energy stocks, PBR hasn’t returned to its former glory days. In fact it has actually gotten worse. PBR stock currently trades for around $11 per share.
What went wrong? Well, the tale at PBR can be viewed through three lenses.
First, the Brazilian government’s populist politics and price controls on various refined petroleum products have continued to destroy PBR’s bottom line. By only allowing Petrobras to sell gasoline at certain prices, the firm actually losses money on its downstream operations. These controls by the Brazilian government extend in other operations of PBR as well, and the threat of an Argentinian-style YPF (YPF) nationalization — however small — is there.
The second piece to PBR stock and its continue deterioration is that Brazil’s overall economy has been poor. High inflation, lower growth and a stalling currency have all clipped GDP expectations for the B in BRIC. The fact hasn’t exactly done wonders for the total returns of PBR stock.
Finally, and perhaps the most hurtful to Petrobras and its overall position, is the continued overpromise and underperformance in its operations. PBR is perhaps well-known for its monster capex spending programs designed to capture the rich deposits in Brazil’s offshore pre-salt fields. The latest of which calls for spending of roughly $220.6 billion between 2014 and 2018.
In order to pay for such high amounts of exploration, PBR continues to rack-up huge debts in order to tap the challenging reserves.
The mounting expenses include $8.5 billion via a series of new bond issuances. So far this year, Petrobras has issued a total of $13.6 billion worth in various debts, including some floating-rate notes. On the whole, the integrated energy stock’s debt stood at $94 billion before the recent new bond issuances.
Big Reserves For Petrobras
While none of the previous issues make a resounding case for buying PBR stock, Petrobras does have a few things going for it. The biggest of which is its vast reserves.