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.