Emerging from a scandal, this energy stock is still somewhat speculative, but two analysts have recently increased their EPS estimates, and most industry specialists expect the dividend to return.
Petróleo Brasileiro S.A. - Petrobras (PBR)
From Cabot Emerging Markets Investor
On the one hand, Petróleo Brasileiro S.A. - Petrobras (PBR) or Petrobras, the Brazilian national oil company, is a very simple story: the price of oil is up to over $65 per barrel for the first time in four years and Petrobras owns a huge amount of oil.
On the other hand, Petrobras is a company that’s finally emerging from what’s possibly the biggest, most dramatic national corruption scandal anyone has ever seen. The story of the corruption (and the dramatic details of how it was discovered and rooted out in “Operation Car Wash”) is worthy of a Hollywood blockbuster, but I’ll just sketch it in and give you a link to the whole saga.
Petrobras executives oversaw an operation that systematically overpaid on contracts for construction, drilling equipment, refineries and drilling ships. The companies that got the contracts kicked back money to slush funds that were used to finance political campaigns. With the entire political power structure on the take, investigation and prosecution was virtually impossible. But not completely.
Two Brazilian presidents were toppled in the scandal along with dozens of other politicians, corporate executives and countless underlings, many of whom are in jail and likely to stay there for a while.
The scandal isn’t over; Brazil’s current president, Michel Temer, is under suspicion and the investigation into the web of corruption—said to have involved about $2 billion in bribes—is continuing. But Petrobras just signed an agreement in principle to pay $2.95 billion to settle a class action lawsuit in the U.S. And the company now appears free of the corrupt obligation to finance an entire political network.
What we’re left with is an integrated oil & gas company with a market cap of $85 billion, reduced operating costs, lower leverage, outstanding technical expertise in offshore drilling and production, and reserves of oil, natural gas and condensates of 10.5 billion barrels in Brazil, Africa and North America.
There is still significant risk inherent in the Petrobras situation. Just this month, Fitch Ratings affirmed the company’s BB debt rating due to political and economic risk (Brazil is, understandably, in a recession). Some analysts think that the ongoing scandal makes Brazil vulnerable to political extremism or a military coup.
But the chart for the company’s stock tells a different story. From its post-Great Recession peak at 49 in late 2009, PBR declined steadily for years, sinking as low as 2.7 in January 2016. The stock rallied to 12.5 in October 2016, then headed sideways, falling to support at 7.6 in mid-2017 and inching back to a high at 11 last November and ending the year at 10. But since the New Year, PBR has been a rocket, with only one correction that lasted two days. The stock has a 14-month base to build on and investors loved the January 24 news that the company’s CEO, Pedro Parente, has said he might stick with the company after the next Brazilian elections. PBR gapped up to 13 on a huge volume spike after that announcement.
The bottom line is that we have a big energy company with big reserves coming out of a big scandal—and we have a sector that’s been on its back for a couple of years showing definitive signs that a new uptrend is underway. Analysts are calling for Petrobras’ earnings to pop higher by 74% in 2018 and the stock usually pays a nice dividend (although the payment hasn’t been approved for 2018, the trailing yield was 2.44%).
I recommend that you do the same. BUY A HALF.
Paul Goodwin, Cabot Emerging Markets Investor, www.cabotwealth.com, 978-745-5532, January 25, 2018