Petroleo Brasileiro Petrobras SA Stock Update

The article takes a look at the causes of the recent Petroleo Brasileiro Petrobras SA (ADR) stock price surge and whether this is sustainable going forward.

On March 13, Petroleo Brasileiro Petrobras stock price tumbled to a multi-year low of $4.90. This drop was due to the biggest bribery and corruption scandal in the company’s history, which took place in October last year.

The company was alleged of increasing its contracts. The excess from this were used to bribe local politicians and former official of company. The share price of world’s most indebted energy company dropped by 75.7% for six months from October’14 to March’15. Above all, the Brazilian oil company share price has also suffered due to decline in crude oil prices.

Earlier in February, the company changed its Chief Executive Officer and other five senior officials to draw a line for the scandal, named ‘Operational Carwash’. In the month of April, the company also noted a $17 billion of impairment charge in its 4QFY14 earnings report. A slice of this total amount almost $2.10 billion was allotted to “improper payments”.

Talking about the Macro-economic outlook of the country, analysts are expecting interest rate in Brazil will top later in 2015. During the start of this month, the Brazilian Central Bank raised the short term interest rate by 50bps to 13.75%. Another smash to 14% is most likely to be seen, however most of the analysts believe the Bank might reached its ability to raise rates.

High rate of interest negatively impact the economic activities of the country. The Central bank of Brazil is focused on controlling the inflation rate. The inflation rate has touched 8.47% 11 year high over the past one year.

Jorge Mariscal, CIO of UBS Wealth Management emerging markets while talking to Barrons said, “Brazil’s economy is not doing well, growth and inflation numbers aren’t good, but there are encouraging signs that policy is moving in the right direction. It’s likely we’re going to see the peaking-out of interest rates over the next few months.”

As of December 2014, the company’s revenue dropped by a compound yearly growth rate of 0.60%. In the coming period, revenue of the company is most likely to drop by 27% on year over year basis to $104.90 billion this year. The main reason for this drop can be due to the uncertainty in crude oil prices and weakening Brazil currency against other currencies.

Presently, Petrobras is trading at 1 year forward 9.6x of price to earnings multiple. It might be appropriate to compare the company valuation with the Brazil Sao Paulo Exchange Index performance then S&P 500 Index.