Is Petrobras a Risky Investment?

With shares of Petroleo Brasileiro S.A. (NYSE:PBR) trading at around $18.04, is PBR an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Petrobras is no stranger to drama. However, it’s not the company’s fault. This has everything to do with the Brazilian government, which seems to be acting in greedy and power-hungry ways. That should come as no surprise for any government. It might even remind readers of the United States government. While we definitely have our own problems, this is one of those situations that should make Americans proud to be Americans. If Petrobras was based in the United States, it would be a big winner.

In regards to the Petrobras situation in a realistic sense, below are some positives and negatives.

Positives:

  • Subsalt region off coast of Brazil likely holds enormous amounts of high-quality oil
  • Divestments are freeing up cash
  • Analysts favor the stock: 6 Buy, 8 Hold, 0 Sell
  • Strong pipeline of development projects
  • Excellent exploration track record
  • Strong cash flow
  • Quality debt management
  • Decreased taxes
  • Brazilian government now allowing Petrobras to raise diesel prices
  • Margins likely to increase
  • Import losses likely to decline

Negatives:

  • Didn’t hold up nearly as well as peers in 2008
  • No dividend yield (dividend yield offered by peers)
  • Decline in revenue in 2012
  • Decline in earnings in 2012
  • Decline in revenue and earnings last quarter on a year-over-year basis
  • Declining production
  • High costs
  • Government interference likely to remain a large burden

Let’s get to some comparative numbers. The chart below compares fundamentals for Petrobras, Exxon Mobil Corporation (NYSE:XOM), and Chevron Corporation (NYSE:CVX). Petrobras has a market cap of $116.55 billion, Exxon Mobil has a market cap of $401.67 billion, and Chevron has a market cap of $229.94 billion.

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PBR

XOM

CVX

Trailing   P/E

11.20

9.25

8.89

Forward   P/E

7.41

10.92

9.45

Profit   Margin

7.53%

10.48%

11.76%

ROE

6.19%

28.69%

20.26%

Operating   Cash Flow

$26.59 Billion

$56.17 Billion

  $38.81 Billion

Dividend   Yield

N/A

2.60%

3.10%

Short   Position

N/A

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for Petrobras is weaker than the industry average of 0.30, but this isn’t cause for concern. Debt management has been good enough.

Debt-To-Equity

Cash

Long-Term Debt

PBR

0.57

$24.04 Billion

$96.41 Billion

XOM

0.07

$9.58 Billion

$11.58 Billion

CVX

0.09

$21.91 Billion

$12.19 Billion

 

T = Technicals Are Mixed

Petrobras has performed well over the past month, but that doesn’t make up for the atrocious performance over the past three years. To make matters worse, there has been no yield to help ease the pain.

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1 Month

Year-To-Date

1 Year

3 Year

PBR

7.09%

-7.32%

-22.63%

-55.67%

XOM

0.16%

3.99%

7.11%

39.22%

CVX

-2.43%

10.19%

19.33%

57.92%

 

At $18.04, Petrobras is trading above its 50-day SMA and 100-day SMA, but below its 200-day SMA.

50-Day   SMA

16.32

100-Day   SMA

17.70

200-Day   SMA

19.51

 

E = Earnings Have Been Inconsistent               

Earnings have been inconsistent, but profits are impressive for the most part. Revenue has also been inconsistent. Inconsistency is not a friend of investors.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

118.26

91.87

120.45

145.92

137.09

Diluted   EPS ($)

4.30

3.54

4.06

3.08

1.58

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

48.08

37.41

34.66

36.26

35.66

Diluted   EPS ($)

0.71

0.80

-0.10

0.42

0.58

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Everything hinges on the global economy and demand. As of right now, everything seems to be steady, but there are many underlying reasons for concern. If the economy and/or markets should falter, then it should be noted that Exxon Mobil and Chevron held up better than Chevron in 2008. They didn’t perform well, but 20 percent and 30 percent losses with dividend payments are a lot better than a 70 percent loss with no dividend payments.

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Conclusion

Petrobras is a great company stuck in a terrible situation. As long as the Brazilian government is involved, the company and its investors won’t be treated fairly. It would make no sense to invest in Petrobras when Exxon Mobil and Chevron are available options.

Petrobras is a STAY AWAY.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.