Over the last few years, stock in the Brazilian state-controlled oil company Petroleo Brasileiro S.A., or Petrobras (PBR), has confounded those who track traditional measures of valuation. The stock has remained stubbornly low in terms of price-to-earnings-ratio (P/E), and even after rallying over the last few days, remains at less than seven times the next 12 months’ projected earnings.
As is so often the case with things that frustrate investors, much of the blame for this can be placed at the feet of politics and politicians. Those same factors, however, are likely to give Petrobras stock a significant boost in the next few months.
Petrobras, as a state controlled company, is understandably enormously influenced by shifts in power within Brazilian politics, as evidenced by the stock’s performance over the last two months.
Figure 1: PBR 2 Months. Chart from VectorVest
It will come as no surprise to anybody that in political terms, big money around the globe tends to lean to the right. Thus, in the run up to Brazil’s presidential elections, as leftist incumbent Dilma Rousseff of the Workers’ Party faced a battle for re-election, stock in PBR began to rise in the expectation -- or rather the hope -- that she could be replaced by Aécio Neves of the pro-business Social Democratic Party. When third party challenger Marina Silva took the lead in the polls, however, things quickly reversed.
However desirable, from a global perspective, you might find the prospect of a president of a large nation having roots in the environmental movement, it isn’t hard to see that such an election could hinder the profitability of a state-run oil company.
On Oct. 5, Brazilians went to the polls and Marina Silva all but disappeared from view. The result, with Rousseff winning 41.4 percent of the vote and Neves 33.7 percent, was close enough to force a run-off.
Given that result, it is hard to envisage how Brazilian politics can remain a drag on Petrobras stock, either in the run-up to the poll on Oct. 26 or shortly thereafter. The opposite is far more likely.
It seems likely that Rousseff will be re-elected. While some of Silva’s support undoubtedly came from an “anybody but the incumbent” sentiment, it is unlikely that those who voted for a candidate who essentially challenged the president from the left will switch to a challenger on the right.
From the point of view of the effect on Petrobras, however, who actually wins is now less important than it once was. It will be obvious that economic, rather than social, issues are at the forefront of voters’ minds and unlocking the potential of an oil giant will be a priority of any president after the election.
Even if there is no immediate policy change towards a more pro-oil stance following the election, however, PBR will still recover. While big money dislikes the political left in general, it is uncertainty that really puts pressure on stocks. The Brazilian market may not have favored a Rousseff re-election, but don’t rule out a significant post-election rally based on the old adage, “Better the Devil you know than the Devil you don’t.”
Of course, politics wasn’t the only influence on Petrobras’ stock. Falling oil prices around the world, for example, have also contributed to recent weakness. All other things being equal, though, the biggest drag on PBR is now in the past, and the future for the stock looks bright.
By Martin Tillier of Oilprice.com
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