Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), the Brazilian semi-public oil giant, is seeing some of its worst days in company history. The company’s stock price has come down by almost 20% since May. The decline is attributed to a weakened Brazilian economy, which has struggled to keep pace with a strong U.S. currency. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is also one of the most indebted companies in the world and much of its debt is dollar-denominated. At the moment, Petrobras is selling imported diesel and gasoline at a loss in the domestic market. However, this is also the right time to invest in Petrobras and in this article, I shall explain why.
A weak Brazilian economy and an indebted Petrobras
As I mentioned before, the Brazilian economy is not doing well at all. And there is no sign of its economy picking up anytime soon, especially with all those violent protests across the country. Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has had to meet increasing demands for energy domestically. Brazil is a country that veers toward the left, which means people pay a lot of tax and a lot of facilities are subsidized.
Whether these facilities are actually helping Brazilians or not is a different story altogether. These subsidies affect companies like Petrobras indirectly, which are already reeling under heavy international debts, reduced international demand for products, and a very weak Brazilian currency. Currently, Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is probably one of the most undervalued stocks out there.
Petrobras’ semi-public status will protect it
The Brazilian government owns 54% of the shares and holds voting rights to the company. Through the Brazil’s Sovereign Wealth Fund and the Brazilian Development Bank, it owns a further 10% of the shares, bringing its direct and indirect ownership to 64%. The rest of the shares are privately held. As the Brazilian government holds voting rights and holds the majority of shares, Petrobras will be aided by Brazilian taxpayers’ money, even if there are going to be hard days ahead.
Petrobras is undervalued, but not for too long
With a five-year expected PEG ratio of approximately 0.7, a price-to-sales ratio of 0.6, and a price-to-book ratio of 0.6, it’s certainly swimming in undervalued territory. However, I do not see the company struggling for a long time in the future.
Here are four reasons why Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’ shares will pick up in the coming years:
1.) To meet domestic fuel demands, Petrobras has purchased its first shipment of LNG from Sonangol, Angola. Some 96 million cubic meters of natural gas was shipped from Soyo to Rio de Janeiro. Petrobras’ decision to forge import agreements with Sonangol will increase its options to purchase LNG and meet domestic demands.
2.) Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is also in talks with China’s Sinopec to construct a $20 billion refinery in the state of Maranhao. The refinery is expected to produce 300,000 barrels a day, easing Petrobras’ troubles a bit. This refinery is one of the four which Petrobras hopes to commence by 2017 so that it can produce 3 million barrels per day by 2020.
3.) Petrobras announced that it would sell and restructure its assets in order to raise almost $10 billion and cut costs by $14 billion.
4.) In early June, Petrobras signed a deal with South Korea’s GS Holdings to build a 300,000-barrel-per-day refinery near Fortaleza.
These practical steps to reduce costs, raise capital and forge new relationships with foreign companies to import LNG in order to meet domestic demand and build refineries to export gas internationally will help Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) to save itself from the mess it finds itself in. However, that will take time and its share price may tumble further.