Does Petroleo Brasileiro Petrobras SA (ADR) (PBR) Provide An Investment Opportunity?
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has had a rocky ride with oil prices plummeting and corruption. Though the company is still under the control of the government, one of the recent statements from the establishment was that it should move on from the corruption issues. There was no doubt that scandals and government control have had a big impact on the stock, as well as the company. However, the recent announcement from Brazil’s President has boosted the sentiments about the stock. Does it provide investment opportunities at this level?
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is in the oil and gas industry sector and everyone knows that worldwide prices of oil has witnessed a weak trend in last six-month period. This might hold back investors’ to think twice before start investing in not just this company but other companies in the oil and gas sector also.
One of the positive factors could be the announcement of an Executive Board constituted recently towards the end of March. The objective of the board seems to be review its organizational model, as well as, corporate governance based on the new business environment. It would also review the investment plans of the company.
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s project to review corporate governance would have the leadership of the CEO besides the Executive Board support. A group of executives would be tasked with reviewing plans in several areas of its operations. The company needs to refurbish its image after scandal has eroded its market capitalization sharply. The company also needs to restore the confidence of the investors. This could be treated as small step in the right direction, though one investors will view with skepticism.
Rise From Small
The company, as well as, investors have seen the highs and lows in the last one decade. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) rose to an international giant in the oil and gas sector in 2010, from a small emerging company in 2002. Its market cap peaked at nearly $244 billion. However, it could not hold on to it and dropped in the years to come. There are several reasons for it. One of the primary reasons for the drop was corruption.
Its rise could be categorized in three phases. One was the discovery of big new reserves in early part of the decade in Brazil. This catapulted the company to be ranked as one of the big oil majors with solid proven reserves. However, these reserves were said to be expensive to develop. Yet, there was a sense of belief that it was a viable to spend due to triple digit levels of oil prices.
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was government-controlled until the government decided to divest some of its stake. Even when it sold part of its stake, the idea was to raise capital for its treasury and not to plough it back into the company for its growth potential.
Nonetheless, the government is not ready to give up its control in the company to allow it to be run professionally. Even when it sold the shares of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), it not only ensured it had over 50% voting rights, it also ensured others from its control are having shares. On top of these, the government has veto power thus ensuring that no major decisions would be taken without its approval.
Though minority shareholders have representation on the board, they were either ignored or face retaliation whenever they resist. Therefore, its board has often been termed as a rubber stamp board.
Sometimes it might sound that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has chosen its own path of devaluation similar to how it witnessed growth. There are few moves that remained unpopular and proved to be a hindrance for the company. For instance, the company invested big money with little interest in returns on the investments. This was possibly due to political pressures.
The oil and gas company invested over 35% of its revenues on capital expenditures, as well as, exploration between the years 2009 and 2014. This was more than 15-20% investments adopted by other oil companies. As a result, its return on capital dropped sharply to 5% despite oil prices staying above $100 plus per barrel for most part of the period.
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) witnessed strong growth in revenue to $135.8 billion in 2014 from $17.4 billion in 1997. It even overthrew Exxon Mobil Corporation (NYSE:XOM) as the third biggest oil producer in the world in the third quarter last year. However, profit margin was not recording growth in tandem with revenue. As a result, profit margin witnessed a dramatic drop. Last year, for the nine-month period, the company’s profit dipped 22%. The government ownership played a strong role, since it wanted the company to subsidize gas price to car owners, placing government policy above shareholder and company interests.
The total debt of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) was $135 billion at the end of the last year, an astonishing number that has only risen since. Though the company raised $79 billion fresh equity in 2010, it remains more dependent on debt financing.
Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is also reportedly planning to divest some of its fastest-growing deepwater oil to raise money for debt payments and expenditures. The company has also been facing ratings downgrade thus preventing it from accessing credit at normal rates.
This along with skepticism from foreign investors about the priorities of the company due to Government ownership places the company in a tough position.
It is difficult for investors to ignore Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s unpopular moves in the past and yet move on with the company forgetting the past corruption. Similarly, the company has also been increasing their debt. On top of these, the current oil and gas price situation does not interest any investors to invest in such companies. This in addition to the fact that investors cannot take the Brazilian Presidents word, nor trust that their interests will be fairly represented makes it difficult for investors to have confidence in the stock.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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