Petroleo Brasileiro SA Petrobras (ADR) (PBR) — familiarly known as Petrobras — is one of the riskier bets on an oil price rebound, but some analysts think PBR stock is a hot speculative bet.
Speculative, indeed.
The state-controlled oil giant has bigger troubles than the rout in prices for crude oil. The Brazilian economy is all but in a depression and the Petrobras bribery scandal is threatening the stability of the government.
Quarterly results were a catastrophe, too. For the most recent quarter, Petrobras lost $9.4 billion. That was narrower than the year-ago loss of $9.7 billion, but on a per-share basis it was worse.
The loss per ADR — which represents two shares — widened to $1.44 from $1.50 in last year’s quarter. Analysts were looking for a loss of just 6 cents per ADR, according to a poll by Thomson Reuters.
Petrobras’ top line was a disappointment, too. Net operating revenue dropped to $22.1 billion from $33.4 billion year over year. Wall Street was looking for revenue of $25.4 billion.
The culprit, of course, was oil prices. The average sales price of oil in Brazil dropped 50% year over year to $33.50 per barrel, says Zacks Equity Research. PBR’s pre-salt oil fields only become profitable above $55 per barrel, according to OPEC. Sub-salt production needs prices of $60-$80 to break even.
Better Sentiment for PBR Stock
The oil glut is old news, however. The real threat to PBR stock is the company’s ballooning debt load. At the end of the quarter, Petrobras had almost $120 billion in long-term debt. That’s why shares rose when the CEO said the company is good for its debt payments through next year.
With those fears tamped down, maybe there is something to Morgan Stanley’s more upbeat stance. Analysts there lifted their rating to equal weight (hold, essentially) from underweight (sell).
Here’s the crux of the note:
“As investors flock to risky Brazilian equities, buoyed by and improving investor sentiment on oil markets will support PBR shares, in our view. Fundamentals have yet to improve and the balance sheet still poses risk, but bear case odds have fallen and we think an Underweight position in PBR is unwarranted. It is all about macro-political developments in Brazil.”
PBR stock is up 46% over the last month, so it has certainly proven itself as a short-term trade, in the least. The catch is that punters might have already missed the move.
If you choose to dabble in PBR, just be careful. As the cliche goes, the market hates uncertainty, and PBR has a barrel full of it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
