Petroleo Brasileiro SA Petrobras (ADR): Major Issues Still Clogging Up the Pipeline (PBR)

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It’s no secret that Brazilian state-owned oil giant Petroleo Brasileiro SA Petrobras (ADR) (PBR) has been a dumpster fire of epic proportions over the last few years.

Major Issues Still Clogging Up Petrobras' PipelineThe former emerging-market highflier and offshore energy giant was hit by a multitude of negative headwinds. All of which conspired to push PBR stock down into the sub-$5 per share category. That’s a far cry from the $70 per share peak PBR hit just before the recession.

However, in recent weeks, PBR has begun to crawl back as some of the negative pressures abated. But investors shouldn’t celebrate just yet. The firm’s latest earnings report showed that PBR still has plenty of warts, with some being very, very serious.

State-owned or not, PBR is still a risky energy stock to play with.

Scandal, Falling Oil Prices & High Debts

Petrobras’ tale of woe began back in 2014, when it was implicated in a wide sweeping scandal. PBR allegedly increased construction contract values and passed that cash on down to politicians and former Petrobras executives. Including Brazilian President Dilma Rousseff. That major scandal resulted in huge write-downs, contract cancelations and other legal hassles for the firm.

At the same time, both the Brazilian economy and oil prices were circling the proverbial toilet. Petrobras is pretty venerable to low oil prices, as its pre-salt deepwater assets are rather expensive to drill. PBR needs high prices to justify tapping them. With oil crashing to lows not seen in about 10 years, PBR was left sinking.

In an effort to get huge and fund their massive drilling programs, Petrobras, like many E&P operators, took on a ton of debt. That debt (now considered junk) was backed by the biggest loss in Petrobras’ history. In the fourth quarter, Petrobras lost a staggering $10.2 billion.

The Latest From PBR

But that was then and this is now. Although, now feels a lot like the previous quarter.

For PBR, the headline earnings number was still pretty bad. Petrobras managed to record its third quarterly loss in a row at 1.2 billion reais or about $340 million dollars. The energy firm also saw a big decline in revenues and output.

So what went wrong?

In an effort to preserve cash, capex spending has been slashed to basically zero. The problem is that you can only cut so much before it hits output. For PBR, domestic oil and natural gas production fell 7% during the quarter. Meanwhile, what it was producing was worth less as oil prices have cratered.

Even the divisions that could feast on the low oil prices suffered: With Brazil in a recession, gasoline demand has dwindled, hurting margins and sales at its refining arm. That division helped Petrobras in recent years turn back the tide against falling oil prices.

Essentially, PBR sold less oil for less money.

The problem for Petrobras is that investors were looking for some progress on its turnaround plans this quarter. Unfortunately, they didn’t get it. The loss doesn’t do anything to help cure PBR of its major debt woes.

Debt at the firm stood at a record and staggering $126 billion. That’s roughly the same as the end of the fourth quarter. What’s bad is that Petrobras actually retired some debt with a new batch of IOUs. These came with much higher interest payments, as it’s not really able to tap the traditional bond market. Back in February, Petrobras had to come crawling to China’s Development Bank Corp. for a $10 billion loan. More recently, the firm hit up China again for another $1 billion.

With earnings and cash flows being pretty lousy, PBR’s cash on hand dropped nearly 21% for the quarter to pay off the interest on its huge debt. Those huge interest payments are expected to last for at least three years. To that end, PBR has announced that it plans on selling nearly $15 billion in assets this year. And while, selling assets can be effective — Chesapeake Energy Corporation (CHK) comes to mind — that amount won’t get PBR’s debt even under $100 billion dollars.

Bottom Line on PBR Stock

The lack of cash will only continue to exacerbate the problem of dwindling production as PBR will have less cash for capex. Management basically said so on the earnings conference. Less oil coming out of the ground at lower prices, and you have a repeat of the last few paragraphs of this article.

None of this takes into account the vacuum of leadership at PBR because of the scandal. As a state-owned oil firm, Brazil’s government gets to handpick the major roles at Petrobras. With Rousseff being impeached, the current leaders of PBR most likely won’t be there as Brazil’s vice president Michel Temer has already stated he plans on shaking things up. That’s assuming Temer gets to stay on after being handed Brazil’s presidency.

Petrobras continues to be a mess. The latest quarter didn’t add any clarity to the situation. The firm’s debts are still insanely high. Poor cash flows and production won’t help on that front — especially with crazy interest payments.

With so many other energy stocks trading for bargain levels, there’s no reason to touch PBR.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/pbr-petrobras-stock-earnings/.

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