- Petrobras has been performing badly as the stock kept going lower without finding a bottom.
- Fundamentally, Petrobras looks cheap compared to both its peers and historical valuation.
- The company is cheap for a good reason; it is controlled by the Brazilian government, which doesn't really care much about investors.
- As the political and economical situation in Brazil continues to be unstable, this stock continues to be a speculation play.
Petrobras (NYSE:PBR) hasn't given its investors much to brag about in the recent years. In the last 5 years, the company's share price trended lower, lower and lower. Just when people thought "it can't get any lower from here" it continued to get lower. In this article we will look at whether PBR is finally in the oversold territory and whether it is a good idea to buy the stock at the current price.
First, let's take a look at the company's revenue trends. With the exception of a few speed bumps here and there, the company was able to grow its revenues up until 2012, when the revenues peaked at just short of $200 billion. After that, as the production fell and the oil prices started stabilizing, Petrobras saw its revenues decline sharply, similar to what it saw during the great recession of 2008.
When we look at the company's price to sales ratios during this period, we see that it ranged wildly from 0.5 to 3.7 with the average figure being a little above 1.0. Currently, this metric is at 0.5 and this is an all-time low for PBR.
Just to add reference and color comment to this information, let's take a look at how PBR's price to sales ratio performs compared to its peers. In this metric, Petrobras is second only to BP (NYSE:BP), which is fighting its own "demons" as we speak. In the major oil companies, price to sales ratios seem to be ranging from 0.62 to 0.97 with the exception of BP and Petrobras. The highest ratio belongs to Chevron (NYSE:CVX) with 0.97, followed by Exxon Mobil (NYSE:XOM) with 0.95, Statoil (NYSE:STO) with 0.83, and Total (NYSE:TOT) with 0.62. From a price-to-sales standpoint, Petrobras looks undervalued both against its historical standards and its peers.
This doesn't tell us much though. Revenues are good, but they are only as good as they can turn into profits. A company can generate all the revenues in the world, but if it doesn't get to keep much of that money at the end of the day, investors won't like the company (unless it's a heavily hyped company like Yelp or a company with a lot of future potential like Tesla). So, let's take a look at profits.
By looking at the chart below, it looks like Petrobras saw its profits peak at around 2012 and things have been moving downward for a while. After massive losses between 2008 and 2010, the company is back to profitability but the profits may continue to decline for a while on the face of declining production, rising production costs and fairly stabilized oil prices.
On the other hand, much of the declines in the company's profitability seems to be already baked in the price of PBR. Currently, the company is trading for 6.59 times its net earnings and 3.20 times its free cash flow and both metrics are either at or pretty close to historically low values. Basically, the market does not have very high expectations of the company and much of its troubles are already priced in by now, evidenced by the low valuation.
Even though much of the company's troubles is already priced in, there are more troubles that may be coming. Political and economical situation in Brazil has not very stable in the recent years. There is always a risk of nationalization with this company; however, the risk is pretty small. On the other hand, the Brazilian government has a lot of control over this company and it will keep gas prices cheap in order to secure votes even if this means lower profits for the company. Meanwhile, the local currencies in the developing nations keep deteriorating against the US dollar and the Euro and this continues to present risk in the future.
Since the government controls the company, a lot of the decisions made by the company will be mostly or purely political. Do we know how much the Brazilian government cares about the investors of Petrobras? For all we know, the investors of the company are way down in the Brazilian government's priority list. The leftist government will continue to use the company as a political tool and this may spell trouble for the shareholders in the long run. I have nothing against leftists or leftist governments; however, I have to analyze this situation from an investor's standpoint.
For example, the company imports liquefied natural gas from South Africa for $18-19 per unit and sells them in the local markets for $11-12 per unit because this is part of a policy by the Brazilian government. It's great for Brazilian people, but is it good for the investors of the company? Even if the global oil prices rise, Petrobras might not be able to take advantage of this because the local gas prices are controlled by the Brazilian government, which has every intention to keep gas affordable in order to prevent a riot in the nation.
This is why the investors aren't buying this fundamentally cheap company hand over fist. While we may be able to calculate the company's fair valuation based on past performance, we simply don't know how much of the company's future troubles are priced in at this point. The amount of uncertainty surrounding this company almost put it in the speculation territory.
Over the years, the company has raised money by selling shares and the investors got hurt badly in each instance. The chart below shows the average diluted share count of Petrobras between 2000 and today. Notice how the number of shares jumped from less than 2 billion to 6.6 billion since the beginning of this century. There is nothing stopping Petrobras from raising more money by selling more shares in the future and the Brazilian government seems to like this idea a lot lately.
Well, how about the dividends? After all, many oil companies are known to be dividend champions and this is what attracts many investors to these companies in the first place. Well, Petrobras doesn't like to share its profits with any shareholders that are not named The Brazilian Government. See the chart below for a dividend history of the company to see what I mean. I would watch this company's dividend policy very closely before buying any shares because this will tell us whether the company has any intentions of returning value to shareholders. If the company doesn't want to return profits to shareholders, it can make all the money in the world but that won't mean anything. By refusing to offer a meaningful dividend, the Brazilian government shows that the investors are way down in its priority list.
Well, Petrobras is fundamentally cheap but it's cheap for a good reason. Owning Petrobras is like owning shares of the Brazilian government and the future of Brazilian government is full of uncertainty. If you would still like to buy shares of this company, just make sure that it constitutes a small part of your portfolio so that your damage can be limited in case things continue to go wrong. If the company changes its mentality towards investors in the future, it may become a good investment at the current fundamentally cheap price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.