Everyone likes an ice-cold PBR. However, your portfolio may not want to take a big swig of Petróleo Brasileiro S.A. (NYSE:PBR), or Petrobras as it is commonly called. Once the darling energy stock of the emerging world and leading Brazilian superstar, PBR has continued to fall among hard times.
And there’s no apparent relief on the horizon.
A variety of serious issues have managed to push down shares of PBR stock down to new lows and metrics not seen in decades. In fact, PBR is so low, value investors might be tempted to pick up some Petrobras.
Resist the urge. Despite being cheap, PBR isn’t the energy stock for your portfolio.
PBR Stock: From Corruption To Low Energy Prices
The promise at Petrobras has certainly been great. Offshore Brazil is home to an energy bounty like none other. The deepwater pre-salt flats off of its coast contain tens of billions of barrels worth of crude oil and natural gas. And as the nation’s state-owned oil stock, Petrobras has access to that bounty. Any international energy firm wanting to tap those reserves must partner with PBR to do so under Brazil’s terms.
Unfortunately, that state-owned energy stock relationship hasn’t worked quite right for PBR stock shareholders.
Since election, Brazilian President Dilma Rousseff has used the energy giant as a political tool by extracted money from it. 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 — which benefits Brazil’s consumers and Rousseff’s political standing — the firm actually losses money on its downstream operations.
Petrobras is losing a lot of money, actually. And while price hikes have been granted, they have failed to come to fruition, inflicting even more pain on PBR’s earnings.
But these problems are common knowledge problem at PBR, and have already been priced into the stock. However, some recent “extractions” from Brazil’s populist government have turned a bit more sinister.
Reports have surfaced that Petrobras and various Brazilian construction company executives have diverted billions of dollars from contracts to politicians in a massive money laundering and bribery scheme. The scandal has already cost PBR CEO Maria das Gracas and five other top executives their jobs as they’ve been forced to resign due to the allegations of corruption.
However, the corruption could go as high as President Rousseff, who was the chairwomen of PBR during the time that the scandal allegedly took place.
And as if to add insult to injury, Gracas’ replacement was from another state-owned enterprise: Banco do Brasil (OTCMKTS:BDORY). New PBR CEO Aldemir Bendine has zero experience in running an oil & gas company.
All in all, you never want to have any sort of monster bribery scandal affecting an investment you own. Especially one that could be quite costly to fix.
The scandal could cost PBR billions in write-downs. Some contractors working with Petrobras — like SeaDrill (NASDAQ:SDRL) and FMC Technologies Inc. (NYSE:FTI) — have braced for the worst and cut the firm’s orders from their backlogs.
What’s more, those write-downs by PBR have yet to be acknowledged. The firm’s latest earnings report — which was postponed because of the scandal — didn’t say a darn thing about the corruption. Nothing. Nada. Zilch.
However, the firm did report profits that were nearly 9% lower due to the drop in crude oil. Petrobras managed to sell oil for an average of $90.73 per barrel for quarter. But oil isn’t trading for anything near that mark today, which means next quarter isn’t going to be so sweet for PBR on the earnings front. Drilling the Campos and Santos Basin pre-salt formations are quite expensive and aren’t even profitable with oil down this low.
Throw Away PBR Stock
Petrobras faces lower oil prices, populist politics crimping margins and profits, as well as a wide-reaching corruption scandal possibly encompassing even the country’s president — to say nothing of the new CEO who probably has never pumped his own gas, let alone spudded an oil well before. That doesn’t exactly make me too giddy to buy shares of PBR stock … even if it is trading for a historically low P/E of 6.
And when you add in the currency effects of the plunging Brazilian Real and the fact that the nation is falling into recession — ironically because of PBR — it really doesn’t make sense to buy shares.
PBR stock topped out around $77 just before Credit Crisis. It has basically sunk like a stone since the bubble popped in 2009. Unfortunately, PBR has only gotten worse since then and has fallen around 91% in value. That huge drop is certainly justified, and the corruption scandal could cause it to fall further.
Just walk away from PBR stock. Odds are you already have a decent sized slug of it if you own any sort of emerging market mutual fund or ETF. There’s no need to load-up extra on the loser. Things are only going to get worse over the next quarter or two.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
