What's Next For Petrobras?

Todd Shriber
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With all the hoopola surrounding Tuesday's congressional races here in the U.S. and the expectation of more quantitative easing news expected to follow on Wednesday, it's easy to forget that the U.S. is not the only game in town this week when it comes to electoral politics. If you were not out trick-or-treating on Sunday or attending a costume party in the wildly popular BP oil spill outfit, you may not have heard that Brazil elected a new president.

It was an historic moment for South America's largest economy as Dilma Rousseff became the country's first female president. This may not be the best news and it has nothing to do with the fact that Rousseff is a woman. It has everything to do with the fact that Rousseff was the preferred choice of the Lula administration. Lula has been a wildly popular president in Brazil and given the country's rapid economic growth, it is not hard to understand why.

Rather, the problem is likely to be the fact that financial markets and Lula himself viewed Rousseff as the most probable of the candidates in the presidential race to continue the outgoing administration's policies. Read: Bad news for Petrobras (PBR).

As I have lamented several times in this space, Brazil's state-run oil giant has seen better days. And nothing has changed since the last time I mentioned the company as the stock is the worst performer among global integrated oil names this year. In theory, that should not be the case. There is almost no excuse for any marginally decent oil company to have seen its stock perform worse than BP this year.

Beyond that, check out the news section of OilSlick. Rare is the week that we do not feature at least one story about Petrobras making another new discovery somewhere or a story about one of Brazil's pre-salt fields possibly having more oil than previously believed. In other words, Petrobras is sitting on some prime real estate. They have the Malibu beach house or Upper West Side penthouse of the oil industry.

While that factor is not ignored by the market, it has a tendency to be overlooked because of the role Sao Paulo plays in Petrobras's very existence. No, a state-run oil company does not equal a bad investment. Just look at Colombia's Ecopetrol (EC), but in the case of Petrobras, government involvement has not been a good thing and an extension of those policies in the form of the Rousseff administration should not be viewed as a positive.

It is obvious the government, not Petrobras and its shareholders is the winner here. Brazil sported a budget surplus of $6.9 billion for the month of September. That is attributable to the $42.5 billion sale of oil rights to Petrobras. Without the sale, Brazil would have had a budget deficit.

No, the facts cannot be ignored and one of those facts is Petrobras American depositary receipts are up more than 4% in the past five trading sessions, perhaps indicating Rousseff's win is a positive near-term catalyst. Going forward, the best medicine for this ailing stock would be for Brazil's government to reduce, not increase as it has done, its stake in Petrobras.