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.