Being a strategic bull still implies that the next directional move is higher, or that there is some way of managing risk/reward metrics. But what happens when there is a polar opposite? Is that a strategic bear? The case of Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR) is a case where it is a wonder why this Brazilian “company” is able to attract any investors at all. Petrobras is effectively a state-controlled oil and gas entity that might as well be like investing into a branch of the government without any implied backstop of the government.
This report is effectively an anti-strategically bullish view. An unfriendly government and a complicated share structure will keep this strategic bull on the sidelines. What’s there to like? That said, investors are on their own trying to figure out if this stock can recover from bad news all over again.
Now with a major sell-off and more bad news yet again it should be easy to know where this is going. The thesis for investing in Petrobras is a waste of time for any energy-focused investor. If you want oil and gas exposure, there are many U.S. and some European oil and gas companies that deserve your money more. Here is the big kicker to think about in a world of climate change and energy regulation — the ESG investing community doesn’t need or want Petrobras any more than any other oil and gas company. The key difference for Petrobras versus others is that Petrobras activities, still in oil and gas operations, are effectively a financial function of the Brazilian government with an oil price metric that is hard to count on.
Perhaps this view should just say “Avoid Petrobras at all costs!” Why would any investor want to get involved here? Brazil’s President Lula has effectively forced yet another CEO out of the picture in Brazil. Whether you consider this scenario a resignation or an ouster is up to you. Petrobras has had the head of the company fire or resign five times in just three years.
Detailed intertwined reports over the news were seen on both Reuters and the WSJ. The reports have shown that Jean Paul Prates is being replaced by Magda Chambriard, who is a former government regulator. This decision was shown to be from Brazil’s Ministry of Mines and Energy. The recent spats over dividends and not lowing oil prices have also been cited. This is where the soap opera meets the “value” case.
This dispute was said to be over dividend payments, but Petrobras does not have a structure like U.S. oil and gas companies. The capital structure case is boring to even consider for most investors, but this situation is awful for investors. Of the common shares, the Federal Government (Brazil) owns 50.26% of the shares. The NYSE-listed ADSs own about 27.4%. The rest of the structure listed as B3 – Non-Brazilian investors, institutional investors, FMP-FGTS/FIA funds, General retail, and finally a tiny number of shares in Treasury.
The total “shareholding structure” is more complicated and you can do your own due diligence if you have that free time on your hands and nothing else to do. Their own website lays it all out and in English for you to see.
And let’s not forget the preferred shares are there for two classes of NYSE-listed shares. The Petróleo Brasileiro S.A. – Petrobras (NYSE: PBR-A) screens out as a 13% dividend yield, while the regular shares screen out as a 12.4% yield. The regular shares were last seen down 7.2% at $15.48 and some 52 million shares had traded hands already with more than two hours to the NYSE close. The “PBR-A” shares were down 6.2% at $14.89 with 16 million shares having traded hand at the same time.
Who wants to bet what the dividend policies will be in the future under a state-controlled entity being run by a former regulator? If you parse through the structure above the reality is that the Brazil government is in line for its share of profits, and the workers have their share, all before the ADS holders get their dividends. And Petrobras had also been loaded up with debt in the previous decade as well. It makes for an exercise where trying to calculate the “what’s left here?” is likely a lot less if a former regulator has any role in determining whether or not to lower oil prices and then decide who gets what in dividends.
One issue that habitually hurts value investors is when they try to apply traditional valuation and operating metrics to non-traditional entities or entities that are in turmoil. Do value investors dare to consider the 9.2 billion barrels of proved reserves (spelled out in English)? And what about the natural gas and NGL in the mix? It’s too hard to know who is going to own what, or what the cash flow waterfall will dictate, anyway. A Finviz screen on the regular Petrobras ADSs shows the valuations at less than 5-times earnings and only 1.23-times book value. The debt/equity ratio is also shown to be 0.76. But with a capital structure that is so much more complicated than U.S. companies it’s hard to trust any of it.
Petrobras is the largest oil and gas company based in Latin America. It has vast deepwater oil reserves. And it has a tug of war over whether the government gets the lion’s share of the money or the investors get the lion’s share. Whether or not it remains the most indebted oil company in the world may not matter. Ditto for its many past scandals.
What’s more surprising than anything is that U.S. brokerage firm analysts have had “Buy” ratings on Petrobras. This same day brought an analyst downgrade by Jefferies, cutting Petrobras to Hold from Buy. Back in March, UBS maintained a Buy rating and a few days prior HSBC raised its rating to Buy from Hold. On March 12, Goldman Sachs maintained a Buy rating and lowered its price target. And on March 8, BofA Securities downgraded Petrobras to Neutral from Buy.
Again, any investor who wants to own large oil and gas companies with vast reserves has many options other than Petrobras. Those same investors also have options with more stable governments and many other capital structures that are easier to understand. Perhaps the largest mystery of all here, despite all of these issues, is that Petrobras ADSs had recovered about 300% from the 2020 lows from the Covid-induced bear market.
