Two of Wall Street’s many tribes — the analysts and the traders — are diverging on what will happen to Petrobras, the massive scandal-ridden oil company owned mostly by the Brazilian government.
Traders tell Business Insider they’re feeling bullish on the beaten up stock, while by and large analysts say they don’t like what they see.
Late Wednesday, Petrobras released its financial statements, which reflected the financial health of this corruption-plagued business. Everyone had been waiting for these since the end of 2014.
A mess is what investors expected, and a mess is what investors got. First of all, reported $US2.1 billion in losses tied to the corruption scandal. It also had a $US7.1 billion net loss for 2014. And stunningly, it wrote down the value of its assets by $US14.8 billion. Management also lowered its capital expenditure plans for 2015 and 2016 by billions. It’s also carrying around $US170 billion in debt.
What the analysts are saying
This is a company in desperate need of cash.
That is why Wall Street analysts are buzzing about how Petrobras will, in no way, be able to generate enough money to keep its business afloat. Here’s some excerpts from today’s research notes [emphasis ours].
- CREDIT SUISSE says that while Petrobras’ write downs are big enough to instill som credibility, “…Capex of $US29-25bn in 2015-16 is not low enough face a 2015 cash generation of $US23bn. 2016 production growth guidance of 3% is low and will disappoint rating agencies. $US3bn divestments in 2015 and $US10bn in 2016… All that leaves with the impression that PBR will continue to be ‘more of the same‘…And ‘more of the same’ in a stock that has rallied more than 50% from lows in just over a month on the hopes of a true turnaround is a dangerous place to be in our view.
- DEUTSCHE BANK agreed:”While lower capex is positive, the savings won’t be sufficient to start deleveraging in 2016, particularly in light of reduced growth plans; hence we expect liquidity will tighten further. ”
- HSBC just doesn’t see the cash flow to match the company’s leverage:We are also still sceptical on Petrobras’ fundamentals based on: 1) the lack of visibility on the options for delivering higher cash generation, 2) a long period of forecast negative FCF [free cash flow]; 3) the current high balance sheet leverage at 4.6x net debt/EBITDA for 2015e.
- GOLDMAN SACHS could only see headwinds and didn’t know what to think: “Despite Petrobras’ inexpensive asset value, we believe the stock remains dependent on: (1) Brent and FX movements, (2) the conclusion of current investigations, and (3) the execution of alternatives to improve short-term liquidity, which all entail reasonable uncertainty, making it difficult to set a bear or a bull case for the stock (with high volatility to continue).”
This is all because back in August, Brazilian authorities started to make arrests in a massive probe called Operation Carwash. It was an investigation into a kickback between the government’s ruling party, the PT, and Petrobras contractors.
They were running the thing like it was their personal slush fund for years. Arrests have been made at incredibly high levels of business and government (though not the highest, because though President Dilma Rousseff once ran Petrobras, she’s remained immune).
What the traders are saying
Now back to Wall Street, where Petrobras became a darling stock during Brazil’s boom years. Near the end of 2013, famed short-seller Jim Chanos gave a presentation about it in London. Corruption aside, he said the company was drilling expensive oil fields with expensive machinery and hiring workers while the government suppressed oil prices. It was a case of bad management.
It was the combination of corruption and bad management that completely tanked the stock, and even after a rally since the start of 2015, it’s still down 30% from this time last year. Also, its credit rating has been cut to junk.
Post-audit numbers, though, the stock is rallying. Up 5% on Thursday. Part of that is because some on Wall Street believe that auditors did a good job pricing in the damage, and now the worst is behind for Petrobras. In other words, we’re going up from here.
One trader at a bulge bracket bank told Business Insider we wouldn’t see the lows in the stock that we’ve seen again.
“The Market tried to sell PBR and Brazil and BRL this morning, after the sharp recent runup, but it has just reversed in their faces… And, one thing for sure, the lows are in. We will not revisit the lows of 3-4 weeks back. There is more room to recover … Global macro guys find Emerging Markets cheap and within them, Brazil is cheaper. Not as cheap as a few weeks ago, but still has value. I am bullish medium and long term, could be pullback but it wil be short and shallow.”
And then there’s hedge fund manager Tim Seymour, of Triogem Asset Management. He’s bullish on Brazil in general, and because of that’s he’s long Petrobras.
“If you’re investing in Petrobras, it’s a 20% oil price story, a 30% governance and transparency story, a 25% balance sheet story. They have avoided technical default… It’s a 25% Brazil story,” Seymour told Business Insider.
And Brazil’s future, he believes, can be seen in the real — the country’s currency — so he sent over this chart:
Brazil has to deal with a plunge in commodities prices, slowing demand from China, civil unrest and political uncertainty for President Roussef.
However, “I don’t think you’re going to see growth out of brazil for another 9 months, but I think certain things are being fixed. Dilma is scared, and she should be,” said Seymour.
Sometimes fear is good.
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