Early June brought Petrobras (
PBR
,
quote
) new CEO Maria das Gracas Foster before the Brazilian congress to
explain losses in the company's value -- and to outline how she
would orchestrate a rebound.
[caption id="attachment_70732" align="alignright" width="300"
caption="Where to next for Petrobras?"]
[/caption]
Missed production targets and currency weakness cut the ADR
shares in half over three year's time. The new chief promised the
stock price would recover over the coming months on an increase in
drilling rigs and reserves. Emerging Money noted that a
rebound was possible in the short-term
on higher allowances in fuel pricing and increased pressure on
management, but that structural problems and governmental
interference would threaten the company over the long-term.
The shares have rebounded 11.8% since then but may have reached
the point where investors should question future valuation.
The company reported Monday that it could see its
first annual drop in production since 2004
on rig shutdowns and lack of equipment. Estimates are for a drop of
2.3% in domestic production this year and is not expected to pick
up over the next two years. The 2020 production goal was cut 11% to
5.7 million barrels a day in Petrobras' latest business plan
published in June.
The company booked its
first loss in more than a decade
in the second quarter on a 1.1% drop in production and regulated
fuel prices that meant domestic sales were made at a loss. The
company lost $665 million compared to a gain of $5.4 billion in the
same period last year.
Much of the company's problems have been related to the
ownership and interference by the government. Petrobras has been
unable to take advantage of the largest oil discoveries in the
region because it must buy 65% of goods and services from local
producers -- goods and services the local economy is just not able
to produce on an efficient scale.
Petrobras stock has been the worst performing among major oil
companies this year, falling 7.1% since January. Performance is
well behind regional peers like Colombia's Ecopetrol (
EC
,
quote
) which has jumped 44% and replaced the Brazilian company as the
largest oil company in Latin America.
Shares now trade at 7.6 times trailing earnings with second
quarter results due out on August 20. Expectations are already
fairly low, with the consensus that earnings per share fall by 57%,
but the company has missed widely in two of the last four
reports.
Looking out more than a year, investors may see opportunities
for Petrobras in cooperation with Pemex and the Mexican government.
President-elect Enrique Peña Nieto ran on a platform of reforms and
partial liberalization to the state-owned petroleum industry, a
large segment of the economy that has also suffered from declining
production from older fields.
Petrobras, the world's largest producer in deep water projects,
is a natural fit for Mexico which has been shut out of drilling in
the Gulf due to lack of deep water know-how. While promised reforms
will take time and competition will be intense for the joint
ventures, Petrobras has the potential to secure some of the
potential projects.
Despite the 5.5% dividend yield and relatively low price,
intermediate problems with production and regulation put me on the
sidelines after selling out of my position last week. Without a
strong recovery in the global economy, there are few
company-specific reasons to buy until management has a chance to
address production issues.
