Why Petrobras Is a Bad Investment

Recently, Standard & Poor’s downgraded Petrobras (PBR) from BBB- to BB, which means that it is no longer an investment grade company. This sudden downgrade in the rating for Petrobras resulted in the Brazilian Real to depreciate by a 1.9% as compared to the US dollar in just one day, which is expected to have an additional negative impact on the company’s liquidity position in the near future.

But, it cannot be denied that Petrobras is making certain moves in a bid to improve its business. Let’s take a look at Petrobras’ moves and see if it can do well going forward.

Taking corrective steps

Petrobras has taken drastic steps to reduce investments in the oil market in order to keep its cash flow in good shape.
For instance, the company has significantly lowered its forecasted spending to $130.3 billion from 2015 till 2019 BMP from $206.8 billion during 2014 till 2018 BMP. The company’s investments will be majorly focused on production development with nearly 82 percent or US$89.4 billion of the total US$108.6 billion of investments followed by investments in exploration, investments abroad and into operational support.

Petrobras is observed to be significantly focused on strategic investments spread across exploration and key productions while reducing its investment target for the forthcoming future and in line with its continued commitment to maintain healthy cash position amid tough operating environment to return a majority of the invested capital to its key stakeholders.

The company also sees nominal year-over-year and long-term growth in demand for oil products including, diesel and gasoline which is expected to drive healthy long-term growth for the key oil and gas driller company, being further supported by its manageable operational cost structure. The company has managed to achieve superior cost control by recording efficiency in managing the contracted services, reorganizing its businesses and rationalizing its cost structure, successfully optimizing its personnel costs, lowering the costs of inputs acquisition and controlling its transportation expenditures.

Although, the demand for oil products seems robust over the forthcoming years still, Petrobras is bound to suffer from the continuing weaker commodity pricing environment, rising costs and the recent devaluation of the Brazilian currency against US dollar.

Weak sentiment

TheStreet ratings team rates Petrobras as a “Sell” with a ratings score of D and primarily driven by several negative factors which are believed to have greater impact than any of the company’s strengths and could make hard for investors to achieve profitability. The company's weaknesses are observed in several areas, like weak return on equity, elevated debt management risk, poor historical stock’s performance and disappointing earnings per share growth.

A majority of the key investment analysts are negative about the growth prospects of Petrobras considering several of its key weaknesses as discussed above.


It will be a good idea to avoid investing in Petrobras as it has a poor profit margin of -7.96%. Moreover, Petrobras is debt-burdened with a significant total debt of $105.23 billion as against a weaker total cash position of $23.21 billion only. So, due to weak end-market conditions and a levered balance sheet, it is a good idea to avoid investing in Petrobras.
Published on Nov 3, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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