Petrobras: A Political Investment?
Petrobras has fallen from grace and the Brazilian Government is largely to blame. The company ruled the roost as the largest market capitalization company in Latin America just about four years ago, with a market value of equity exceeding $200 billion. In the years since, a series of bad management decisions and scandals have dragged down value.
Markets, for better or worse, have tied Petrobras' fate to whether the current government headed by Dilma Rousseff will return to power, viewing her as responsible for much of the troubles at the company. In fact, the stock price for the last few months has tracked the polls, rising as Dilma's poll numbers drop and rising as her numbers go up. The stock price chart for the last few months brings this home:
The deterioration in Petrobras' numbers is clear when you look at how earnings have dropped off the ledge in the last few years.
In the valuation of Petrobras, I allow you to choose the future course for the company. Bad news: If the company continues what it did last year, the value of equity is negative – it owes more than it owns. Good news – if the company can turn things around, by improving operating income to historic norms, by reducing the debt ratio to what it was, on average, over the last five years and can exploit its immense reserves for high growth, it is worth more than the current stock price.
I have no idea what the future will bring for Petrobras, but it is a fascinating case study in how much damage external interference can create in a company. Take the valuation model for a spin and make your own judgments. If you really want to make this interesting, do your valuation before the final round for the elections on October 26. Have fun with it! I did!