Petrobras: Brazil’s Political Shift And Oil & Gas Prices Not Helping

Petroleo Brasileiro S.A. or Petrobras (NYSE:PBR) is Brazil’s energy giant, headquartered in Ro de Janeiro since its founding in 1953. The company’s profile states:

At just below $10 per share on January 5, PBR’s market cap stood at the $58.06 billion level. According to Seeking Alpha’s factor grades, the company scores an A+ in valuation and profitability, making PBR a compelling investment opportunity. However, grades of C- and D- in growth and momentum are troubling. The highly liquid stock that trades an average of over 32.5 million shares daily has been paying a $3.44 dividend, translating to a whopping 35.4% yield at $9.71 per share. A December 15, 2022, article on Seeking Alpha pointed out the warning signs that have “historically led to dividend cuts.” Even if PBR slashed its yield in half, it would remain almost ten times the average for the S&P 500. Moreover, it would be nearly five times the dividend yield of the XLE ETF, which holds the leading U.S. energy companies, including an over 42% exposure to Exxon Mobil (XOM) and Chevron (CVX), two of PBR’s competitors.

PBR shares traded to a high of $16.32 on October 21, 2022. At $9.71 on January 4, the stock dropped 40.5%.

PBR is sensitive to traditional energy prices, but a political leadership change in Brazil could be the leading factor weighing on the shares.

A significant political change in Brazil

In a late May 2022 article on Seeking Alpha, when PBR was trading at $14.78 per share, I wrote, “The over 21% dividend is reason enough to buy PBR shares, as the attractive yield pays a risk premium for those waiting for capital appreciation.” In that piece, I also pointed out the upcoming election would be “highly contentious.”

The early October election led to a run-off between the business-friendly and capitalist incumbent Jair Bolsonaro and challenger former President and Socialist Democrat Lula da Silva. President Bolsonaro exceeded expectations in the first election, leading to higher prices in PBR shares.

The chart highlights the $16.32 peak in PBR shares, 10.4% higher than the May $14.78 level. The dividend only added to the gains in Brazil’s state energy company.

On October 31, former President Lula da Silva unseated President Bolsonaro. Since the October 21 peak, PBR shares have made lower highs and lower lows, leading to a decline to an $8.88 low on December 14.

President Lula, a former trade unionist, supports higher wages and a greener path for Brazil’s energy policy. He appointed Jean Paul Prates, a senator, former Petrobras official, and critic of the company, as PBR’s CEO. At a recent press conference, Prates said, “All oil companies are turning into energy companies, and it isn’t just talk. None of this is happening at the right scale at Petrobras.”

From a political perspective, investors rejected the new CEO and President Lula da Silva’s energy policy and sold PBR shares.

Oil and gas prices plunge

Over the past months, the price action in the oil and natural gas futures arena has been bearish.

The nearby NYMEX crude oil futures chart highlights the decline in the energy commodity that took the price from $130.50 in March 2022 to just over $70 per barrel in early December 2022. Crude oil has made lower highs and lower lows, and the price settled near the recent low at $72.84 per barrel on January 4, 2023.

Meanwhile, nearby natural gas prices plunged from the highest level since 2008 at over $10 per MMBtu in August 2022 to just over $4 on January 4, 2023. Falling oil and gas prices have weighed on PBR shares. While all oil and gas-related stocks have experienced corrections with the energy commodity, PBR has done a lot worse.

A bearish cocktail for Petrobras

PBR fell from $16.32 on October 21 to $9.71 on January 4, a 40.5% plunge. The XLE reached its 2022 high on November 14 at $94.71 per share. The ETF that holds the leading U.S. oil and gas companies was trading at $84.39 on January 4, a 10.9% decline.

Markets reflect the economic and political landscapes. When it comes to PBR, the election result and energy prices were a double whammy and a toxic bearish cocktail for the shares as investors fled Brazilian oil companies because of the new President’s agenda.

Petrobras is not the only Brazilian asset that has declined

Capitalism under Bolsonaro shifted to social democracy under President Lula da Silva. While Brazilians narrowly elected the new President, the markets have awarded the new administration a thumbs down.

The chart shows the decline in the Brazilian real against the U.S. dollar. The Brazilian currency dropped from $0.19905 in early November to the $0.1841 level on January 4, a 7.5% fall.

The iShares MSCI Brazil ETF (EWZ), which holds a 12.11% exposure to PBR along with other leading Brazilian companies, fell from $34.59 on November 4, 2022, to $26.34 per share on January 4, a 23.9% plunge.

The bottom line is the markets believe that a social democratic agenda will offer few if any, rewards for investors.

Levels to watch in Brazil’s energy giant

I favored PBR in May 2022, but the landscape has changed. While the dividend remains highly attractive, the political and economic landscapes have changed.

The trend is always your best friend in markets, and it is bearish for PBR shares.

The long-term chart shows the recent $8.88 low broke below the $9.20 technical support level from September 2021. Below, support is at $7.06, $6.15, and $4.01, the March 2020 pandemic low. PBR shares traded to a low of $2.71 in January 2016 when President Lula da Silva’s handpicked successor, Dilma Rousseff, was the country’s President.

The war in Ukraine, U.S. and European energy policies, and OPEC’s influential position favor oil and gas prices as we move into 2023, despite the recent price corrections. PBR is Brazil’s international and powerful state-owned energy company, ranking sixteenth, behind China’s Sinopec and ahead of China’s CNOOC. PBR’s market cap remains higher than Occidental Petroleum, Phillips 66, Sempra, Valero, and Hess.

PBR has been around for seven decades, and the state oil company will continue to operate in South America’s most populous country with the continent’s top economy. While the dividend may be attractive, any purchases should leave lots of room to add if the stock continues to decline. The risk is always a function of any potential rewards. The political change in Brazil increased PBR’s risk profile, and the stock’s trend remains lower in early 2023.