By Joseph Hogue CFA
The new CEO at Petrobras (PBR), Maria das Gracas Foster, is under pressure to do something about the slumping Petrobras stock price. Foster was named CEO in January after Petrobras stock halved in three years and missed last year's production target by more than 6.0%. She recently promised congress that Petrobras stock price would recover in the coming months on an increase in drilling rigs and reserves.
The new chief may be able to orchestrate a short bounce in Petrobras stock if she can show at least a marginal turnaround in performance or plans for believable plans for improvement.
Analyst expectations for the current quarter have come down 5.5% in the last month alone and the company missed expectations for earnings per share in three out of the last four quarters, missing by 45% last quarter. A lowered bar may set Petrobras stock up for a relief rally on management plans at the second quarter call in July.
Despite lowered expectations and pressures to show improvement, the company will be facing some significant challenges in the second quarter. Company CFO Almir Barbassa recently disclosed that Petrobras could face negative effects from currency movements due to its $76 billion in dollar-denominated debt. The real has depreciated significantly since the government reignited its 'currency wars' in March. A weaker real means foreign denominated debt will now cost more to be repaid. Additionally, a stronger dollar and weakening global environment has pushed oil prices into a bear market, down more than 20% in the last few months.
The government names seven of the ten-member board and has enacted several laws that control operations. Petrobras must purchase at least 60% of its equipment from domestic suppliers, a rule that has resulted in higher costs and platform delays in the past. The government has capped the price for fuel in Brazil and the company loses money on gasoline sold to domestic customers, yet motorists pay higher total fuel costs due to taxes.
Another law passed recently requires the company be the sole operator on new pre-salt developments, testing management's ability and access to technology. As the government struggles with uncoordinated policies in an attempt to stimulate growth, the long-term prospect for the Petrobras stock becomes increasingly exposed to policy risk.
Besides problems with its own government, the company has had to contend with exploration suspensions in neighboring Argentina for not investing enough to develop hydrocarbon deposits. Petrobras is in talks to regain rights with provincial governments in Argentina, but could hit further roadblocks as the government of Cristina Fernandez de Kirchner looks to oil assets to prop up its struggling economy.
Both companies have strong five-year compound growth in revenues, 20.4% for Ecopetrol and 24.4% for PetroChina, compared to growth of just 13% for Petrobras. The growth rate for cash-flows from operations at Ecopetrol (17.1%) is well above both Petrobras (10.4%) and PetroChina (8.7%). Dividend yields at all three companies exceed 4.0% and are seen as fairly reliable.
Valuations at the Brazilian company are lower, just 6.5 times trailing earnings, but could increase in the face of a 26% decline in earnings per share over the last year. While all three companies are state-owned, Ecopetrol will benefit from a much more market-friendly government, while continued economic growth in China should support PetroChina.