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Good Tidings for Petrobras But Brazilian Economy Still Weak

Brazilian state-run energy firm Petroleo Brasileiro S.A. or PetrobrasPBR has confirmed light oil potential in the Carcará area in the ultra-deep waters of the Santos Basin. The confirmation came after the drilling success of Petrobras' third well in the region.

The company affirmed that it has encountered good quality oil in the well. Also, the pressure data suggests that the oil is from the same accumulation as the previous two wells drilled in the region. With Petrobras consistently making new finds and growing production, some of its pricing woes could be mitigated.

Additionally, per a report from Reuters, Petrobras plans to increase gasoline and diesel prices at Brazil's refineries. The company will raise gasoline price by 6% and diesel price by 4%. The hiked price will be effective from Sep 30, 2015.

This is an important move for Petrobras as the company has been selling gasoline at a loss over the past several years just to help the government put a check on inflation. With mounting troubles for the company - corruption scandal, high debt levels and weak commodity prices - such a move is a welcome one.

Moreover, Petrobras' efforts were recently appreciated by Brazil's Finance Minister, Joaquim Levy. The minister believes that the company is taking proper measures to improve operations.

These positive developments gave the company's stock a boost. NYSE-listed ADRs of Petrobras gained about 4.5% on Sep 29.

However, the Brazilian economy has been in troubled waters of late. The Brazilian real has hit a historic low, unemployment rates have flared, inflation rate is significantly above the government's target and consumer spending has seen a substantial decline, all culminating in the nation's woes. The plunge in crude prices has further added to the woes as the commodity is a big revenue generator for Brazil.

The Brazilian investment market's predicament intensified when Standard & Poor's downgraded the nation's credit rating to "junk" earlier this month.

All these factors have taken a toll on Brazilian companies and Petrobras is no different. The company is the highest indebted energy firm in the world. Huge leverage and declining revenues make the company even more vulnerable to the broader weakness in the economy. In the near term, the negative aspects may heavily outweigh the recent positive developments.

Zacks Rank & Key Picks

Currently, Petrobras carries a Zacks Rank #3 (Hold).

Some better-ranked players from the broader energy space are Tesoro Corporation TSO , Northern Tier Energy LP NTI and Matrix Service Company MTRX . All these stocks sport a Zacks Rank #1 (Strong Buy).

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PETROBRAS-ADR C (PBR): Free Stock Analysis Report

MATRIX SERVICE (MTRX): Free Stock Analysis Report

NORTHERN TIER (NTI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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