Bad news has become good news for Brazil’s Petrobras.
Otherwise known as Petróleo Brasileiro (ticker: PBR), the state-controlled oil producer and refiner has been embroiled in a corruption scandal that has netted scores of company insiders, politicians, and contractors.
The investigation isn’t over yet, but auditors and the Petrobras board finally agreed last week on much-delayed results for 2014. The net result: a loss of $7.4 billion, or 56 cents per U.S.-traded share, following a huge impairment charge of $16.7 billion.
Petrobras shares, however, rallied 13% last week to a recent $9.95, contributing to a 36% climb so far this year. The shares are still down a lot over a 12-month span, and, by some measures, the valuation is attractive. But the recent gains have made the stock pretty fully valued in light of the potential for more problems. We’d steer clear.
The $7.4 billion figure included only $2.5 billion in corruption-related losses, much less than some analysts expected. But the book is not closed on the multiyear Car Wash scheme, in which contractors and Petrobras leaders allegedly conspired to rig bids and pocket money. Witnesses are still taking the stand. The company reports first-quarter results in May. Brazil’s President Dilma Rousseff, who headed the Petrobras board for a time and has denied any knowledge of the scheme, is still vulnerable; protesters have demanded impeachment proceedings.
AS BIG A PRICE as the company has paid, it remains laden with more than $130 billion in debt.

Petrobras corralled some $12 billion in loans from entities including the China Development Bank in recent weeks, and that should help cover 2015 obligations. By releasing results for 2014 before April 30, Petrobras averted a disaster in which debt would have come due early, and it can reopen the door to capital markets. But spending less on exploration—Petrobras’ oil riches are buried beneath deepwater salt beds—means future profits will suffer.
Petrobras plans to sell assets worth roughly $14 billion in 2015 and 2016. It won’t pay a dividend this year, which is of no matter to the traders and short-sellers who have battled over the stock in the past year.
The collapse in oil prices—the international Brent benchmark is hovering near $64.85 per barrel—affects the entire industry, but Petrobras’ retrenchment is austere, writes Raymond James Analyst Pavel Molchanov.
The shares do hold some appeal. Petrobras’ price/earnings ratio is about 10 times estimated 2015 earnings, while companies in the iShares MSCI Brazil ETF (EWZ) trade at above 16 times. The broader MSCI Emerging Markets index trades at about 13 times.
But Esty Dwek, global strategist at Loomis Sayles Investments in London, tells Barron’s via e-mail that much of the good news appears priced in.
“Head winds remain, which will keep volatility elevated going forward,” writes Dwek. “The impairment charge was lower than most estimates, but the asset sales planned remain hurdles…ongoing questions about the company’s credit rating and whether it remains investment grade are likely to keep uncertainty high. The road ahead remains long for Petrobras, and it is unlikely to be smooth.”
Ultimately, this crisis could make Petrobras more shareholder friendly. If oil prices rise, so will the stock. For now, the mistrust runs about as deep as its oil assets, some of which may have to be sold to the highest bidder.