Given its weak fundamentals and tepid outlook, we see little
reason for investors to hold on to the stock of Brazilian state-run
energy giant Petroleo Brasileiro S.A., or
Petrobras
(
PBR
). We expect the company to continue to struggle based upon the
number of near-term challenges that it faces.
Headquartered in Rio de Janeiro, Petrobras is the largest
integrated energy firm in Brazil. The company's activities include:
the exploration, exploitation and production of oil from reservoir
wells, shale and other rocks, and in the refining, processing,
trade and transport of oil and oil products, natural gas and other
fluid hydrocarbons, in addition to other energy-related activities.
In August, Petrobras reported its first quarterly loss in 13 years
on the back of a weak domestic currency, rising costs and heavy
fuel imports. Loss per ADR came in at 10 cents (1 ADR = 2 shares),
contrary to the Zacks Consensus Estimate of 33 cents in profit.
During the corresponding period last year, Petrobras earned $1.06
per ADR. Petrobras' net operating revenues of $34.7 billion were
down 9.4% from the second quarter 2011 level.
Petrobras - which aims to surpass
Exxon Mobil Corporation
(
XOM
) by 2020 to become the world's largest oil producer - has embarked
on an ambitious investment program for the 2012-2016 period,
totaling a massive $236.5 billion. This is expected to
substantially increase the company's leverage and deteriorate its
credit metrics during the current downturn in the economic cycle.
Additionally, the increasing capital intensity of its operations
may result in reduced returns going forward.
In September 2010, Petrobras raised R$120.4 billion ($70 billion)
in the biggest global share issue in history. Following the share
sale, the Brazilian government boosted its stake in Petrobras, now
controlling approximately 63% of the voting power. This has led to
investor skepticism regarding heightened state interference in the
company.
Petrobras' deep-sea pre-salt reserves include fields that are
located at water depths of more than 2,000 meters and then a
further 5,000 meters below sand, rocks and salt - making
exploration technologically complex, challenging and expensive. As
such, the success of these projects remains uncertain and bears a
great financial risk.
Finally, Petrobras is expected to suffer from its inability to
shift the burden of rising oil costs to its consumers, as mandated
by the state policy of keeping a lid on gasoline and diesel prices.
Given these concerns, we expect Petrobras to perform below its
peers and industry levels in the coming months. Our long-term
Underperform recommendation is supported by a Zacks #4 Rank
(short-term Sell rating).
PETROBRAS-ADR C (PBR): Free Stock Analysis
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EXXON MOBIL CRP (XOM): Free Stock Analysis
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