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Petrobras: fears of price fixing look overdone

To see why Luiz Inácio Lula da Silva worries some investors, look at the share price of Petrobras. São Paulo’s stock market staged a small rally on Monday, the day after the leftwinger won Brazil’s presidential election. The state-controlled oil group tumbled, falling 8.5 per cent.

Petrobras is a touchstone of uncertainty about the Lula government that will take office on January 1. Its stock price reflects fears of big-state intervention of the kind that did damage in the past. This was particularly serious under the presidency of Dilma Rousseff, Lula’s chosen successor following his previous two presidential terms in 2003-2010.

The hope is that pragmatism will prevail. Petrobras has long been a symbol of Brazilian national pride. Producing 2.6mn barrels per day ranks it as one of the world’s largest oil producers. It is regarded as a global specialist in deepwater exploration.

However, its local dominance — 73 per cent of its revenues are sourced in Brazil — has invited governments to control pump prices, subdue inflation and boost popularity ratings. Campaigning this year, Lula promised to do the same again.

Campaign talk is easy. Delivering such promises would be harder. Jair Bolsonaro, the outgoing rightwing president, fired three Petrobras presidents for refusing to bend fuel prices to his will. If Lula tries the same, he will find markets and a predominantly conservative Congress stacked against him.

Nevertheless, there is a risk that Petrobras will be pushed to make commercially unsound investments, such as in refining and fertilisers. Despite soaring profits and record dividend payouts — $17bn in the second quarter, more than other majors — and very reasonable debt, Petrobras is inexpensive. Its forward enterprise value to ebitda of under 2 times is well below relatively cheap European peers.

Even with the threat of windfall taxes hanging over energy companies, Petrobras already suffers a big gap due to past state interventions. Lula will need to clarify his intentions towards the oil champion before that gap can close.

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