Shares of Petrobras (PBR), the giant Brazilian oil company may look like a screaming buy for such an enormous company. But buyers beware. PBR stock is no surefire rebound play.
PBR stock hit a 52-week low of $3.72 on Sept. 28, and the shares are up more than 40% since. However, PBR is down 12% from its October high, with additional downside in sight.
In fact, PBR stock remains down 92% from its all-time high in May 2008, when Petrobras was the sixth-largest company in the entire world. Its market cap peaked just above $300 billion; now it sits at $30 billion.
PBR, or more formally, Petróleo Brasileiro S.A., has some things going for it — but the company carries some big-time negatives as well.
PBR Stock Pros
It has huge reserves: Petrobras controls some huge — or potentially huge — oil and gas fields off the coast of Brazil. Its Campos basin produces 70% of Brazil’s oil and gas. Its reserves total some 11 billion barrels of oil, which is the fourth largest of any oil company.
Its size: Founded in 1953, Petrobras is the biggest company in all of Latin America, and it remains one of the world’s largest oil companies, with massive operations from oil or gas well to gas pump. The Brazilian government still owns about 51% of PBR directly. Financing arms of the government control an additional 10% of the stock.
It can’t fail: As Reuters’ Kevin Allison and Neil Unmack noted, noted, PBR can’t go down without causing major disruptions to Brazil’s economy and probably to all of Latin America.
PBR Stock Cons
Oil prices: Oil collapsed in 2014 and continues to stay low this year. That drop has cut revenue and profits substantially. Light sweet crude, the benchmark U.S. crude, settled at $45.20 a barrel on Thursday, down 58% from the June 2014 peak of $107.95 and down 14.2% this year alone. Brent, the benchmark North Sea crude, is off by similar amounts.
Brazil’s currency: The real is down some 20% this year, which has thrown the Brazilian economy into turmoil. Industrial production has been tumbling.
Workers: Employees are striking for higher wages. The strike has cut Petrobras’ current oil and natural gas production by up to 13% or so from pre-strike levels.
Scandal: Petrobras is still reeling from the huge bribery scandal that erupted in 2014. The scandal, rooted out by a massive probe known as Operation Lava Jato (Operation Car Wash), has implicated politicians, PBR executives and executives of some Brazil’s biggest construction companies. As much as $3.5 billion may have been illegally peeled away from Petrobras and into the hands of Brazilian politicians.
Debt: PBR is heavily burdened by more than $130 billion in long-term debt and, as of June 30, had a debt-to-equity ratio of 1.3. Reuters’ Allison and Unmack noted that falling revenue and the depressed real have pushed PBR’s debt to more than 7.5 times earnings before interest, taxes, depreciation and amortization (EBITDA). For comparison, Exxon’s ratio of debt to EBITDA is closer to 1.
A Hazy Outlook for Petrobras
To make the debt burden worse, Petrobas bonds are being downgraded to junk. Moody’s made the cut in February, and Standard & Poor’s followed suit in September. Those downgrades have pushed borrowing costs higher at a time when the company is planning more than $100 billion in exploration and production investments through 2019.
CEO Aldemir Bendine has been trying to sell some $15 billion in assets through 2016 to pay down debt. The company recently struck a deal to sell a 49% interest in a natural gas-distribution business to Japan’s Mitsui & Co. for about $490 million. But The Wall Street Journal reported late Thursday that other deals may be slow in coming because the Petrobras board isn’t buying into Bendine’s plans.
PBR reported a loss of about $7.5 billion in 2014 on revenue of $143.6 billion. This year, revenue is projected to fall to just under $98 billion, down more than 30% from a year ago. And next year’s revenue is expected to remain mostly flat.
It probably can’t get much worse, which is why some bottom-fishers like the stock. In fact, over the past year or so, there have been a number of calls for investors to buy PBR stock, with analysts and writers arguing PBR had bottomed. Each time, the stock moved lower.
Maybe $3.72 was the bottom. PBR stock has stayed above $4.70 for more than a month, now. But that’s the trouble with PBR. You don’t know when oil prices will move higher to a level that will allow the company to generate serious profits again. You don’t know whether the company can sell assets fast enough to cut the debt level down so it can stave off bankruptcy. You don’t know if the real has stabilized.
So an investment in Petrobras is risky, to say the least. If you’re convinced that PBR stock has bottomed, only invest with money you can afford to lose.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
