Petrobras (PBR) was once one of the most dominate forces in the energy sector, but the company has since fallen on hard times. Really hard times.
A combination of factors — both internal and external — have caused Petrobras and PBR stock to falter. So much so, that PBR managed to drop from a peak market cap of $130 billion down to around $30 billion in a short amount of time.
That plunge has taken PBR stock all the way down to just $5 per share.
The huge drop and less-than-a-Lincoln share price could make value hounds bark with glee at the chance to own of the world’s largest oil companies on the cheap. They may, however, want to silence that dog. The problems at Petrobras are wide-reaching and PBR stock is still no bargain.
A Multitude of Issues With PBR Stock
To say that Petrobras has imploded would be an understatement. After peaking at around $70 per share, PBR stock has sank all the way down to just $5. The reasons behind that massive collapse are a complex web of problems.
To start with, global oil prices aren’t exactly cooperating with PBR’s bottom line. 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 primary access to that bounty.
Unfortunately, that pre-salt bounty is ridiculously expensive to drill. It’s in ultra-deepwater, under enormous pressures and requires all sorts of high-tech equipment to even consider drilling it. Tapping it while crude oil meanders in the $40 to $60 per barrel range doesn’t make sense.
That’s a problem for PBR, whose onshore legacy fields are dwindling and the pre-salt regions were the major sources of its production growth over the last few years. Now, with the pre-salt plays completely priced out of the question, PBR is starting to scale back capex in the region. This includes ending contracts with offshore drillers — from Transocean (RIG) to SeaDrill (SDRL) — early.
The expense of drilling has taking its toll on Petrobras over the last few years. Debt has ballooned at the Brazilian driller as profits and cash flows have remained elusive. PBR currently sits on $134 billion worth of debt as of the second quarter of this year. Over the next five years, PBR will need to find a way to pay off around $39 billion of that. A daunting task considering falling production and lower-for-longer oil prices.
Also adding to that debt issue has been the collapsing Brazilian economy. The emerging market has once again slipped into recession and has crimped oil demand. The real has also plunged; and rather than cut interest rates to help mitigate the recessionary pressures, Brazil’s central bank has actually raised rates to cut inflation, most recently keeping rates unchanged. That’s only helping to prolong the pain by PBR and other firms located in the nation.
But oil prices, debt and a recession are only part of Petrobras’ problems. The major issue is a tad more sinister.
PBR Will Continue to Suffer
The beginning of year saw PBR embroiled in a major corruption scandal encompassing various politicians, company executives and even Brazil’s president, Dilma Rousseff.
The scandal involved a system of contractors overcharging state-owned PBR for construction contracts and using the “extra” as kickbacks for politicians and Petrobras and contractor managers. Several Petrobras officials have already gone to jail for money laundering and accepting bribes.
As PBR has begun to mark down assets due to the scandal, the losses for Petrobras continue to mount. Brazilian Federal prosecutor Deltan Dallagnol — in charge of running the task force in charge of the investigation — estimates that PBR has lost more than $5.3 billion due to corruption.
And while all of these issues have already pushed PBR stock down 32% year to date, none of them have been solved since the stock hit these new lows.
Oil prices continue to remain in the toilet and will most likely remain in a tight trading range for the foreseeable future. Even then, forecasts for oil prices in 2016 are only at $70 tops. That’s not exactly rainmaker material for PBR’s pre-salt deepwater fields. In fact, it might not be good enough at all in some cases.
While the higher prices will help on the production and capex side of things (making it easier to spend the money to drill), the huge debt load is still looming in the distance. PBR is going to need much higher production and cash flows to really tackle that debt.
As for the scandal, that could be the nail in PBR stock’s coffin. Even though it’s now out in the open, people are being punished and Petrobras has begun taking its write-down lumps; but the real issue is coming via a series of major shareholder lawsuits.
Because PBR stock was one of the largest emerging market stocks, a variety of investors owned it, including a hefty amount of institutional investors. With Petrobras collapsing, these pension, insurance and endowments have lost millions and they aren’t happy. Pension funds in a variety of places — from New York City to Idaho — have already begun the process to sue Petrobras.
The city of Providence, Rhode Island is seeking a record $98 billion from Petrobras for its share of losses. Other investors looking to put the spurs to Petrobras for the PBR stock losses include the Bill & Melinda Gates Foundation.
While PBR stock may not drop that much further, it’s not going to surge anytime soon. The continued pressure of the collapsing Brazilian economy and oil prices will keep a tight lid on shares. The scandal and its bottom legal payouts will only serve to tighten down that lid even further.
For investors, Petrobras and PBR stock are firmly in the “don’t buy” camp.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
