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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Rousseff Impeachment May Breathe Life Into Petrobras

Petrobras’ stock has been a disaster for investors for years. Even when virtually every other oil company on the planet was seeing their stock move higher, PBR still somehow managed to sink further and further into the red as investors lamented the mismanagement of the firm and its poor business practices. All of that may be starting to change now though, with the government of Brazil in the midst of a significant reshuffle.

Like socialist Brazil, Petrobras has been inefficient and ineffective for years as it has squandered its own natural advantages while suffering through a sea of poor leadership as thick as any oil sludge. The impeachment of Dilma Rousseff and her increasingly desperate and unlikely efforts to maintain her position as president Brazil, are changing the situation for Petrobras. Ironically, state giant Petrobras is where Rousseff’s fatal scandal began, and her downfall and the pressure on the company as a whole are exactly the panacea that investors need. Related: Can Saudi Arabia Really Break Its Dependence On Oil?

The Petrobras scandal will likely change the face of Brazil itself and, with it, the 51 percent government owned Petrobras. Petrobras, like so many other state owned companies has largely been used as a political tool through history. That will probably change now – the involvement of politicians in Petrobras will likely be closely monitored and any impropriety could be radioactive for a politician’s career. In addition, VP Temer, who will take power if Rousseff is impeached, appears to be open to changing the rules that have hobbled the oil industry in Brazil for the past decade. Related: Big Oil Pulls The Plug On Arctic Oil, Relinquishes Drilling Rights

Moreover, Petrobras itself is inexorably linked to Brazil’s economy, which has been struggling for years now – not as badly as neighbors Argentina and Venezuela, but badly enough to give Russia a run for its money as the worst performer of the BRIC nations. If Temer implements reforms in the economy, it should lead to considerable economic growth in Brazil, which in turn would help Petrobras. What’s more, Petrobras is less likely to be forced to act as a political tool by keeping gas prices artificially low to disguise the underlying problems Brazil has with inflation. Furthermore, an economic recovery and political changes would give PBR cover to undertake more layoffs, which are sorely needed given the current market collapse. Related: Oil Spikes After EIA Reports Surprise Draw 

The positive winds of change have already started to be reflected in PBR’s stock, which has rallied from $2.71 a share earlier this year to over $7 in recent trading – a near tripling that outperforms virtually every other major stock in the oil patch. There is probably more positive news to come though. The situation with PBR has been so bad for so long that it’s not hard for even small improvements to lead to a large upwards movement in the stock.

While PBR is exposed to the same industry winds that are buffeting the rest of the oil sector, like Exxon and Chevron, PBR is essentially too big to fail. It is inconceivable that the Brazilian government would ever let the company fail regardless of how low oil prices fall. That issue aside though, PBR has vastly more staying power and lower extraction costs than many of the distressed U.S. shale companies. With that in mind, investors should keep an eye on the timely resurrection of PBR’s once dead stock.

By Michael McDonald of Oilprice.com

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  • afisher on May 24 2016 said:
    One has to wonder if this was written prior to the news in Brazilian newspapers is that this was not an impeachment process but a coup to cover up the Temer et al corruption.

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