Energy Business

More Serious Concerns Growing About Petrobras

Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras, is going to be in serious trouble if the outside pressure keeps mounting. While the company has to contend with lower price realization down the road in Brazil, there is just nothing going its way. On top of protests and corruption, things are continuing to mount against what could be a great oil company, if it were not being run as a social entity by the Brazilian government.

24/7 Wall St. may be most concerned about another matter — the challenge to the $5 handle for the American depositary shares. The old $5 rule no longer applies as frequently as it used to, but the reality is that it is still a mental issue for many investors.

Elsewhere, we have seen a slew of issues being brought up outside the company, by Morningstar, S&P Capital IQ, Fitch Ratings — even getting booted off an index.

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Morningstar has lowered its fair value estimates. That should say “slashed” but it didn’t. Morningstar said:

We are changing our fair value estimate for Petrobras to $12 per share from $21 after reducing our midcycle price estimates for oil and natural gas and increasing our cost of capital assumptions. Our valuation methodology incorporates three years of strip prices, with terminal prices defined by these longer-term forecasts. We currently believe the appropriate midcycle prices for oil and natural gas are $75/barrel Brent, $69/bbl West Texas Intermediate, and $4 per thousand cubic feet Henry Hub. Our new fair value estimate also includes reduced capital costs and operating expenses, based on our expectation for falling oil service fees.

Fitch has also brought up concerns about the oil giant’s credit default swap (CDS) spreads. On Tuesday Fitch said that the intensifying scrutiny surrounding Petrobras has sent CDS spreads to their widest levels ever. Fitch Solutions said in its CDS Case Study Snapshot:

Five-year CDS on Petrobras widened out 24% last week. CDS liquidity for Petrobras has also increased, with contracts currently trading within the second global percentile. … CDS widening for Petrobras likely reflects market concerns stemming from the continued delays in publishing its audited fiscal results amid money laundering scandals surrounding the company’s contracting practices.

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Then there is the issue that even indexes are starting to eject Petrobras. The Dow Jones Sustainability Index notified Petrobras that the company is no longer a member of the Dow Jones Sustainability Index World. Petrobras had been part of the index since 2006. The change is to take effect as of March 23, 2015. The company’s filing said:

The committee based its decision on the charges of corruption investigated by Lava Jato Operation. The committee announced it will monitor the development of the investigations and Petrobras’s position throughout the year, and may reconsider its participation in 2016. … As for Lava Jato Operation, Petrobras restates it is working closely with the public authorities, as well as complying with the requests made by its stakeholders, including the Dow Jones Sustainability Index Committee.

S&P Capital IQ just said on March 14:

Our risk assessment reflects PBR’s position in a volatile, cyclical and capital-intensive sector. We see its exploration success and large domestic oil reserves being offset by limited financial and engineering resources to develop them, which may lead to delayed project execution. Poor visibility into the impact of the ongoing corruption scandal also heightens risk.

Maybe not all is bad in the world, at least today. Petrobras shares are actually up — by 2% at $5.20, against a 52-week range of $4.90 to $20.94.

24/7 Wall St. would like to make one reminder in a situation like this. The news flow has been so negative and the situation has become so bad around Petrobras that any news at all that looks even remotely good might cause one massive rally. Whether that theoretical rally is a trade or a bottom is a different matter entirely.

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