Petrobras Stock Poised to Drop Further Amid Corruption Scandal and Credit Rating Downgrade

Strategic Insights -

The Brazilian oil producer faces significant challenges as corruption investigations, a credit rating downgrade, and economic recession weigh on its stock price. JPMorgan Chase & Co. cut its rating on Petrobras stock to neutral from overweight, citing Brazil's deteriorating economic and political environment, volatile oil prices, and currency depreciation. Petrobras's American depositary receipts have fallen 72% in the past year amid corruption investigations and accounting reviews.

Key Takeaways:

  • Petrobras stock is poised to drop further as Standard & Poor's cut Brazil's credit rating, increasing financing costs for the state-controlled oil producer.
  • JPMorgan Chase & Co. cut its rating on Petrobras stock to neutral from overweight, citing Brazil's economic and political deterioration, volatile oil prices, and currency depreciation.
  • Petrobras faces a decline in the value of its currency, the real, which has driven up payments on its dollar-denominated debt.
  • The company's credit rating has been cut to junk level by S&P, and its debt is expected to reach $134 billion by the end of 2015.
  • Petrobras's oft-touted pre-salt reserves are break-even at $45 to $55 a barrel, and new York crude futures are close to $44 a barrel, making some of its oil uneconomical to pump.
  • The company's failure to meet a target of $15 billion of asset sales may pose a risk that it will have to sell stock at depressed valuations.
  • Further cuts to Brazil's rating are possible, and a downgrade by either Fitch or Moody's could lead to capital flight by pension funds and other money managers.

Statistics:

  • Petrobras's American depositary receipts have fallen 72% in the past year.
  • The company's debt is expected to reach $134 billion by the end of 2015.
  • Brazil's credit rating has been cut to BB+ from BBB- by S&P.
  • The country's economy is projected to contract 2.5% this year and another 0.5% in 2016, according to S&P.
  • New York crude futures are close to $44 a barrel.
  • Petrobras's pre-salt reserves are break-even at $45 to $55 a barrel.

Sources:

  • Standard & Poor's
  • JPMorgan Chase & Co.
  • UBS
  • Petrobras's Annual Report
  • TheStreet.com article (September 11, 2015)
  • UBS's research report (mentioned in the article)