Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR, NYSE:PBR.A) is a company in absolute disarray. Some investors make a living betting on turnaround opportunities like Petrobras. But still more get burned doing so, and PBR stock is still prone to go up in flames.
Off 51% in the last year and down 84% in the last five years, PBR stock has given us no reason to believe the bottom is here. There’s a laundry list of serious problems plaguing the company, and the cold hard truth is that they can’t be remedied overnight.
Sell this dog — today. Keep PBR stock, and its fleas will infest your portfolio for years to come.
Let’s Call a Spade a Spade
Petrobras is Brazil’s own state-controlled oil producer (while publicly traded, Brazil owns 64% of PBR), which already isn’t an ideal situation for foreign investors. Investing in state-controlled companies isn’t inherently dumb, it just adds another layer of risk on thick. Now we’re not just counting on Petrobras’ future success, but Brazil’s political stability and the Brazilian real’s exchange rate against the U.S. dollar.
As we know, the U.S. dollar has been enjoying a tremendous rally recently. That’s bad news for large multinationals like McDonald’s Corporation (NYSE:MCD), The Coca-Cola Co (NYSE:KO) and General Electric Company (NYSE:GE), which are seeing diluted results when they convert overseas earnings back to dollars. But the strong dollar is even worse for pure plays on foreign markets like Petrobras.
In the last year alone, the dollar has soared nearly 40% against the Brazilian real. A rising dollar has also heavily contributed to slumping oil prices, as the commodity is priced in U.S. dollars. That’s a double-whammy for PBR stock.
And we haven’t even gotten to the company-specific problems facing Petrobras.
PBR stock is up about 15% in the past five days, as investors celebrated bullish comments from Brazil’s President Dilma Rousseff and an influx of money from Chinese creditors. The fact that China Development Bank believed in Petrobras enough to give it a $3.5 billion loan was a much-needed vote of confidence for PBR stock, though I believe ultimately that confidence is misplaced.
Petrobras is a shady investment. The company still is reeling from a probe into allegations of multibillion-dollar laundering and bribery, the details of which are still being sorted out. PBR was also effectively priced out of international debt markets after the scandal became public and the company’s debt was downgraded to junk status.
More worrisome still for PBR stock is the agonizingly long delay in the release of its third-quarter results, which were expected in November. While a limited, unaudited report was issued in late January, full results still haven’t been released, although President Rousseff (the former Chairman of the Board for Petrobras) says they’ll be out later this month.
Yes, that’s right. PBR’s financials are five months overdue.
Bottom Line
These aren’t minor flaws, or an argument over relative valuations. PBR stock is littered with flaws that are too large to ignore.
Petrobras has lost the trust of international financial markets, and it’s lost my trust as well. Take the gains from the recent rally in PBR stock and run from the hills before it’s too late.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
