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Petrobras Deal Should Lift Dead Weight From Bovespa

|Includes: Petrobras - Petroleo Brasileiro S.A. (PBR)
Even a lukewarm Petrobras offering might give the Bovespa and the Brazilian ETF a lift in coming weeks.
The reason? Petrobras has been a lead weight for this index all year, as shareholders have anticipated this dilutive offering.

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Now that the pricing is just days away, a massive overhang should be removed.
Top Bovespa Components
Vale SA                                 10.9%
Petrobras                            9.9%
BM&F Bovespa                 4.2%
Itau Uniban Holdings     3.9%
OGX Petroleo Gas            3.7%     
Source: Reuters 3000 Xtra
Petrobras is the No.2 stock on Brazil's 68-member Bovespa index, and 9.9 percent of the index's weight, according to Reuters data.
YTD Performance
Petrobras                            -26.3%
Bovespa Index                  -0.28%
Source: Reuters 3000 Xtra
And it's the fourth-worst performing stock on the index year to-date, down about 26 percent.
All Petrobras has to do is stop working against the Bovespa, and the index has
a much better shot at new year highs.
The Bovespa is now just a whisker away from the August highs. It can clear that soon, at which point should challenge year highs, roughly another 6 percent higher.
Now for Brazilian stocks as a whole to really get some traction, you can't have Petrobras sabotaging things.
So PBR, the Petrobras ADR, has to hold this consolidation pattern towards year end. It can't really slip below this $31 level.
That's NOT a given. The stock is still in a downtrend. And there's reason to think this offering won't be smoking hot.
As part of this share offering, Petrobras is paying the state about $8.51 a barrel for oil that's deep underground.
That's on the high side; $5 a barrel would have been dirt cheap, and $9 or $10 would have been clearly too much.
There are big technical challenges to the type of deepwater drilling this deal will fund. And potentially new political risks.
The shares don't reflect that. Petrobras still trades slightly above its long-term P/E average, and also is above the StarMine intrinsic value model.
Now all of that said, here are the three reasons why the index why this deal shouldn't be a total bust, lifting the load on other Brazilian stocks.
One, look at how truly unique this deal is for the biggest of investors. It's been more than 30 years since an oil field this big was discovered.
It's the only long-term bet of its kind for the sovereigns, hedgies and other big oil companies.
Two consider the overall stability of Brazil for these long-term bets. A strong economy, a growing consumer class, little risk of nationalization…  Think of how this deal might have gone over had Petrobras been a Russian company.
Three is simply the scale Petrobras could have long-term. If all goes to plan, Petrobras could become THE most important oil company in the world over time.
So for the rest of the year , expect this deal to lift dead weight off other Brazilian stocks.
And in the very long-term, Petrobras is a fascinating big bet, but one you can probably get on the cheap when oil’s at a lull.

Disclosure: none