Petrobras: Brazil's Political Turmoil Means Opportunity

Michael Teague  |

Shares for Brazil’s state-run oil and gas giant Petroleo Brasileiro ($PBR) gapped up slightly at Thursday’s open and moved higher throughout the early half of the trading session after the company released its earnings statement for the fourth quarter and full-year 2013.

Petrobras, as it is commonly known, posted revenue of $150 billion, with net income at $10.3 billion during the year, an 11 percent gain on the prior year. The $2.7 billion in profits during the fourth quarter of 2013, however, were 19 percent shy of the year-earlier period.

While the earnings news likely contributed to shares moving up on at least three times average volume throughout the day, the stock has already spent the current week making gains on the heaviest trading in the energy sector, meaning that other catalysts are at foot.

On Tuesday, Petrobras management told UBS AG (UBS) that it expects the government to raise the price of gasoline this year, and unequivocally stated its commitment to not issue any more equity or debt in the foreseeable future.

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But more significant than any of this most likely is the political turbulence that has continued in the wake of massive and widespread protests last year. The government of President Dilma Roussef has increasingly been on the ropes after its attempt to raise public transportation fares sparked unrest throughout the country and metastasized to include a flock of social and political issues.

One of the many criticisms of the Roussef administration is its purportedly unfriendly or even exploitative attitude towards the business community, and many have suggested that the government uses Petrobras as a cash cow to supplement all manner of spending needs.

Brazil’s political opposition has seized on a number of corruption scandals that have been uncovered in recent months, particularly the company’s $1 billion purchase in 2006 of a refinery in Houston, Texas, that Petrobras now admits was improperly handled.

This is unfortunate for the Brazilian president, who happened to be occupying a spot on the company’s board of directors at the time.

Though there has been little indication that Rousseff herself actually had anything to do with the refinery purchase, which turned out to be more or less a disaster, the whole matter has further energized her already frothing opponents, even if they are not likely to remove her from office when Brazilians go to the ballot box later this year.

Either way, the market appears to be warming back up to the state-run giant, perhaps sensing that there will be an opportunity to put a substantial new wedge between the government and a massive company that sits on some of the largest offshore reserves on the planet, but who has failed to execute due to the interference of politicians, who have been more than happy to divert Petrobras’s revenues to the popular social programs that keep them in office.

Nearing the closing bell, shares for Petrobras were up 7 percent to $12.85, and have added around 10 percent in the past week of trading.


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