A lot can happen in a month’s time, and the recent rally of Petroleo Brasileiro SA Petrobras (ADR) (PBR) — better known as Petrobras — is a prime example.
After heading toward what looked like another year of ignominy, PBR stock suddenly found new life. Last March, shares jumped 54%. So far this month, PBR is up 10%.
Of course, much of this bullishness is a direct result of the Brent Crude Oil Index finally getting its act together. Since bottoming in late-January, crude oil prices are up 59%.
But can Petrobras continue to piggyback off this momentum? Many energy insiders are giving a resounding yes.
Where Does Petrobras Go From Here?
In addition to the crude oil rally, the Brazilian Real currency has jumped 14% this year — the best performing currency in the world during the first quarter. This is in spite of massive sales of foreign-exchange reverse swaps by Brazil’s central bank, actions which typically weaken the real. The currency boost is seen as the markings of a much-needed economic revival. Consequently, the benchmark exchange-traded fund iShares MSCI Brazil Index (ETF) (EWZ) is up nearly 40% year-to-date.
More significantly, both public and political sentiment is gearing toward the ouster of Brazilian President Dilma Rousseff. Such is the discord that the government could potentially set the stage for new leadership in only a matter of days. This is widely regarded as a necessary turning point for the Brazilian political scene, as well as an economy wracked with inflation and anemic growth. It could also spark a sustained run for PBR stock, which is still trading at multi-year lows.
Outside of these favorable domestic conditions, a high-level meeting involving major oil producers will take place in Doha, Qatar on April 17. Of critical importance is the prevalent oil supply glut. A coordinated effort by OPEC to artificially constrain supply would in theory help return PBR and other oil companies to profitability.
There’s only one problem — coordination requires cooperation. Two of the world’s biggest oil producers — Saudi Arabia and Iran — are in absolutely no mood to speak with one another. In fact, Saudi Arabia is only game for a production cut if Iran does the same. Iran has bluntly stated that it will not discuss the issue at all. The good news here is that Petrobras can take that option off the table.
It’s also not clear how any of the aforementioned fundamentals will specifically impact PBR stock as a viable investment over the long run. Even if the Doha meeting successfully initiated production cuts, this would be a strategy requiring sacrifice and patience.
As things stand, time is not a luxury Petrobras can afford. The company took a sharp 32% reduction in revenue for 2015, which contributed to an ugly $8.7 billion loss in net income. PBR also absorbed nearly twice the debt load from 2010.
Bottom Line for PBR Stock
The rise of the real is likewise a mixed bag for Petrobras. While a stronger currency gives individual Brazilians increased purchasing power, let’s be honest, Brazil is an exporting economy. It’s no coincidence that exports from Brazil reached an all-time high in August of 2011 — the same period when gold was also trading near record levels. In other words, a strong Brazilian currency isn’t likely to be a panacea for PBR.
Finally, the potential removal of President Rousseff from power is meaningful for Petrobras shares, but more from a short-term perspective. Just as much as our own political madness can engender market moves, I can easily see a situation where PBR stock jumps 20%. But can it continue to add to those crazy gains?
Common sense would tell us that it took more than one person to get Brazil into this mess. Conversely, it will take more than one person to get the country out of it.
Similar to many other oil companies, Petrobras is mainly a beneficiary of an immediately resurgent oil market. But how long this can last? That’s the billion dollar question.
The solution from OPEC is to squeeze supply to pump demand. That requires a united front, and the Middle East is anything but. Back home in Brazil, PBR will likely cash in on exciting political developments. But over the long term, PBR is staring at an uncertain future — something that’s sadly not unusual these days.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
