Problems Persist For Petrobras

Todd Shriber
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Last month, I filled this space with a piece about some of the myriad issues facing Petrobras, Brazil's state-run oil giant. The commentary can be viewed (HERE), but to summarize, the article notes that Petrobras is a seriously challenged stock and investors who are interested in the shares might do well to hold off a bit as better prices would likely avail themselves. Better prices have arrived as Petrobras closed at $33.52 today, more than $2 lower from their closing price when I wrote my previous piece, but that lower price probably is not an invitation to get involved stock, not yet at least.

Petrobras is a writer's dream because the company makes a lot of news and the alliterative qualities of the company name make it fun to write about. Call me easy to please, but I can have a lot of fun with lines like ''Persistent problems plague Petrobras.'' Try saying that five times fast. Word games aside, there are a host of issues that still make Petrobras (PBR) a risky bet from the long side at this juncture.

Earlier this month, Petrobras beat consensus estimates with a second-quarter profit of $4.7 billion, but on a percentage basis, the profit growth was slight at best and significantly lagged the growth posted by U.S. and European rivals such as Exxon Mobil (XOM) and Royal Dutch Shell (RDS-A). China's Cnooc (CEO) also made the Petrobras results look paltry by comparison and PetroChina (PTR) is likely to do the same when it reports results later this week.

As if that was not bad enough, Petrobras saw its debt as a percentage of assets rise to 34% in the second quarter from 28% a year earlier. The company had previously said the threshold is 35% before its barely investment grade credit rating could be endangered. Press reports have subsequently said the credit rating is not in danger, but the rising debt load is not an encouraging sign.

A day after the earnings release, 13F filings showed that billionaire investor George Soros dumped his entire Petrobras stake in the second quarter (15 million shares). Ouch. Soros may have been running for cover before Petrobras dilutes its shareholders in a big way with a looming secondary offering that could be worth more than $60 billion. The company will sell $25 billion to minority shareholders and the rest will be used to swap shares for oil rights currently held by the Brazilian government.

The dilution to shareholders is bad enough, so it would be best to just get the offering over and done with, but Petrobras cannot even do that. The company does not want to pay more than $6 per barrel for the 5 billion barrels of crude it wants to buy from the government, but the government may charge up to $8 a barrel. All of this wrangling over price could lead to a second delay for the offering while Petrobras shares continue to take it on the chin.

As I mentioned last month, the only oil major to notch a worse performance than Petrobras this year is BP (BP). Add the following to list of anecdotes that show just how perilous Petrobras is right now: The only reason Vale (VALE) has not surpassed Petrobras for the title of Latin America's largest company by market value is because Vale has been tied to some fertilizer M&A rumors. Second, Petrobras has lost more of its market value this year than any other company in the Americas besides Microsoft (MSFT).

Long story short, there are a host of words beginning with the letter ''P'' that aptly describe Petrobras at this point, but the best word for the stock may very well be pungent.