Petroleo Brasileiro Petrobras SA (ADR) (PBR), Centrais Eletricas Brasileiras SA (ADR) (EBR): This Brazilian Energy Play Is Still Looking Good

Page 1 of 2

Millions of Brazilians are currently protesting in their country, demanding better public services. The country’s economy has been performing poorly, missing analysts’ growth estimates in the last five quarters. In first quarter of 2013, the economy registered growth of just 0.5%, while analysts were expecting 0.9%. The markets are now looking for modest growth at best due to weak fiscal policy and increasing inflation. The country has finally moved to increase its benchmark interest rates to offset inflation, but Standard & Poor’s has already cut Brazil’s sovereign credit rating to BBB, which is dangerously close to “junk.”

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)

Meanwhile, two of the leading US-listed Brazilian firms, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), also known as Petrobras, and Centrais Eletricas Brasileiras SA (ADR) (NYSE:EBR.B), also known as Eletrobras, have also had their ratings cut by the S&P to BBB with a negative outlook. The former is a leading semi-public energy firm, while the latter is an electric power generation, transmission and distribution company.

Brazil’s capital markets are represented in the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ), which has dropped by 18% in the last three months. The fund has recorded a net outflow of $790 million in the same period. The ETF represents total net assets of $5.7 billion and includes 81 large and mid-cap Brazilian stocks, including Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) and Centrais Eletricas Brasileiras SA (ADR) (NYSE:EBR.B). Petrobras, including preference shares, is the biggest holding in the ETF with a weight of 11.7%, while 0.5% of funds are allocated to Eletrobras.

With mounting economic and social challenges, and the poor performance of Brazilian real against the dollar, I believe that iShares MSCI Brazil Index Fund will most likely under-perform in the coming months.

Meanwhile, Centrais Eletricas Brasileiras SA (ADR) (NYSE:EBR.B) has been struggling with falling transmission and generation sales. Speculations abound regarding a significant drop in the company’s revenue in the near future due to the planned reduction in electricity prices by the government. About a month ago, Eletrobras posted an enormous quarterly net loss of $17.8 billion. With a trailing-12 months profit margin of -25%, a return on equity of -11.3% and a year-over-year quarterly revenue drop of 15.6%, Eletrobras is currently the opposite of an attractive investment.

Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has been selling foreign assets as it wants to focus on its domestic reserves. It has a massive $237 billion five-year investment plan, which is by far the largest program of corporate spending in the world. The company aims to sell its foreign assets to increase focus on Brazil’s southeast coast on the Atlantic seabed which, according to some estimates, hold reserves of 100 billion barrels of liquids. The assets on sale include oil fields, refineries and exploration rights in several countries including Japan, Peru, the United States and Argentina.

The company’s decision to leave Peru was identified in a recent Reuters report but no official word has come out yet. It has recently agreed to sell its 50% stake in the African operations to Brazil’s investment bank, Banco BTG Pactual, against $1.5 billion. It has also planned to sell its 49% stake in a subsidiary which operates 13 small hydroelectric dams with capacity of 291MW to Companhia Energetica Minas Gerais (ADR) (NYSE:CIG), more commonly known as CEMIG, for $303 million. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) also sold its six exploration blocks located in the U.S. Gulf of Mexico for $110 million.

While Petrobras originally wanted to raise $14.8 billion from asset sales between 2013 and 2017, it received a lackluster response from the potential buyers so the target was later reduced to $9.9 billion.

The company’s investment plan is ambitious in the truest sense of the word; it is 1.6 times Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’ annual sales, 2.6 times its market cap and 10 times its current cash reserves. Petrobras has recently given some bad news to its investors; its much-awaited Comperj refinery, aimed at lowering Brazil’s fuel imports that have hit the profits of Petrobras, will now start operations from August 2016 – that is one year later than scheduled.

Add that to the ratings downgrade and we have the main reasons behind the performance of the company’s stock.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!