Will Petrobras Find Support?

With shares of Petroleo Brasileiro (Petrobras) (NYSE:PBR) trading around $16, 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:

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T = Trends for a Stock’s Movement

Petrobras operates as an integrated oil and gas company in Brazil and internationally. The company operates in several segments: exploration and production; refining, transportation and marketing; gas and power; biofuel; distribution; and international. Energy operates the products that fuel global expansion. Petrobras is a major player in the energy industry that is well-positioned to provide the products that consumers and businesses require across the globe.

T = Technicals on the Stock Chart are Weak

Petrobras has seen a downtrend since making highs in 2008. Since then, the stock has yet to recover and is currently trading at multi-year lows. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Petrobras is trading below most of its key averages which signal neutral to bearish price action in the near-term.

PBR

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Petrobras options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Petrobras Options

37.04%

46%

40%

What does this mean? This means that investors or traders are buying a good amount of call and put options contracts, as compared to the last 30 and 90 trading days.

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Put IV Skew

Call IV Skew

April Options

Steep

Average

May Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a good amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Petrobras’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Petrobras look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-30%

-109.43%

-21.57%

-62.26%

Revenue Growth (Y-O-Y)

-6.34%

-9.34%

14.75%

11.92%

Earnings Reaction

-8.26%

-5.45%

2.67%

2.85%

Petrobras has seen mostly decreasing earnings and revenue over the last four quarters. From these figures, the markets have been very emotional about Petrobras’s last four earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Petrobras stock done relative to its peers, BP (NYSE:BP), Royal Dutch Shell (NYSE:RDS), Chevron (NYSE:CVX), and sector?

Petrobras

BP

Royal Dutch Shell

Chevron

Sector

Year-to-Date Return

-18.01%

-1.23%

-6.56%

6.7%

-7.42%

Petrobras has been a relative underperformer year-to-date.

Conclusion

Petrobras participates in an area that is essential to many consumers, businesses, and overall global growth. The stock has not been able to recover from selling pressure and is currently trading near multi-year lows. This may be coming from the disappointing earnings and revenue figures the company has posted. Relative to its peers and sector, Petrobras has trailed in performance by a significant margin. STAY AWAY from Petrobras for now.

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