JUL 19, 2016
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She’s baa-aack. Not yet anyway. Brazilian suspended President Dilma Rousseff surrounded by social justice warriors who have become the most outspoken critics of a conspiracy to unseat her from the presidency. Dilma is the most unpopular president in decades. The Petrobras scandal, in which her Workers’ Party paved the way, ultimately brought her down. Her return will bring down Petrobras asset prices overnight. (Photo by MIGUEL SCHINCARIOL/AFP/Getty Images)
Petrobras shares are more likely to hit $10 than they are ever to see $5 again. But there are at least two significant headwinds that could pull the rug out from under Brazil’s humiliated oil major.
One is the pending impeachment trial of suspended President Dilma Rousseff. No one thinks she is coming back and a recent poll suggests that only 33% think she shouldn’t be impeached. That number jives well with the percentage of the population that would identify themselves as far left of center. Dilma being a goner by the end of August seems like a safe bet.
Should she return, Petrobras shares would tumble. While this may represent a good buying opportunity for both Petrobras equity and debt, Dilma’s return is the least of the company’s worries.
The biggest headwind for Petrobras: lawsuits. It has more lawsuits on it than a mangy mutt has fleas.
In the United States alone, there are 27 cases against Petrobras. These cases, represented by six law firms, involve hundreds of institutional investors here that are taking on Petrobras. For much of the last 12 years, Petrobras was run as an ATM machine for the ruling Workers’ Party and its allies in the Democratic Movement Party and others down the food chain. Roughly $14 billion was ransacked from the company, though that number is being disputed by legal teams from New York to Rio de Janeiro.
In early July, Petrobras lawyers appealed a September 19th case in New York on a technicality. Lead counsel in the case from the Pomerantz law firm said the company is simply stalling. It has a lot to hide. And, literally, is running out of places to hide it.
Petrobras whistleblower Venina Velosa da Fonseca, who claims she was threatened at gunpoint by unknown assailants, will testify against the company regarding “financial irregularities.” A deal seems to have been struck between the courts and one of the ring leaders in the Petrobras crime spree, Marcelo Odebrecht. Odebrecht, a local billionaire, was the CEO of the conglomerate that bears his surname. Incarcerated for 19 years in a Curitiba federal prison, Odebrecht has given his plea bargain agreement to the higher courts in order to lessen his prison term. This does not bode well for Petrobras management looking to conceal Brazil’s crime of the century. Nor is it good for the political chieftains who were in charge when the company was being pillaged.
So far, there is no talk of calling in former politicians for testimony in the U.S.
Petrobras is likely to dish out over $10 billion combined in settlement fees when all is said and done. The legal battle represents a significant negative for Petrobras going forward.
On the other hand, the crisis gives new leadership at Petrobras a chance to reduce its overhead. It also gives the government the incentive to pass a law that takes Petrobras out of its mandatory participation in certain lucrative deepwater oil and gas concessions. That means Petrobras can spend less money, and focus on what it already has deep off the coasts of Rio and Sao Paulo. A Dilma return would surely derail that bill.
Petrobras said this week that it will decide on its sale in fuel distribution unit BR Distribuidora by August 1, a sign that the company is desperately trying to hit its planned $14.4 billion divestiture target. So far this year, it’s sold under $4 billion in assets. Newly minted CEO Pedro Parente took office in June saying he wants to sell assets and cut debt, but has been quiet on dumping its numerous pre-salt oil wells. Between the gasoline distribution unit and a possible sale of petrochemical firm Braskem, if Petrobras were to be freed of participating in deepwater oil concessions, these things would likely trump the unknowns of legal trials.
At more than six times earnings before interest, taxation, depreciation and amortization, Petrobras’s gross debt can only be reduced two ways: selling its prized possessions or a miracle, like a $100 barrel of oil. No one thinks oil is going to $100 anytime soon. That leaves the courts and politics the two biggest nearby obstacles to Petrobras shares pulling into the double digits again.
Dilma’s return does not necessarily negate Petrobras’ divestiture plan, but it likely puts the concession law on hold until 2018, which would be her last year in office if new elections were not held before then. The legal fights, meanwhile, will be a negative trigger. Sales of subsidiaries may drag stocks down based on investment firms recalculating revenue streams for Petrobras, but while it may be a negative for stocks, it will be good for debt.
If Petrobras sells more assets, and if the new government led by former Dilma vice president Michel Temer passes the new deepwater oil drilling concession bill, all of this would be a massive tailwind for the company. Petrobras is likely in a holding pattern until those things become known.
On Tuesday, Finance Minister Henrique Meirelles said that public spending cuts were a priority, but selling up to $35 billion in public controlled assets through “concessions, privatization or securitization” are absolutely on the table.
Petrobras shares are up 97% year-to-date.
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