Petroleo Brasileiro: Zacks’ Bear of the Day Play

Petroleo Brasileiro (PBRAnalyst Report) has been in a rough spot of late, highlighted by the recent release of their audited financials from the Lava Jato accounting scandal.  To compound the difficulty, the company currently carries a massive debt of +$130 billion.  Further, PBR has to deal with persistently low oil prices, and a balance sheet with a 53% debt to capital ratio.  Due to all these negative issues, Petroleo Brasileiro is the Zacks Bear of the Day.

This Zacks Rank #5 (Strong Sell) is an integrated company operating in exploration, production, refining, retailing, and transportation of petroleum and its byproducts at home and abroad.

After the accounting scandal, a new management team was put in place, but they have been immediately confronted with the massive +$130 billion debt, and deep-water drilling projects that have been put on delay over the past 6-8 months.  Even though management has significantly decreased their capital budget (2015 decreased by $32 billion), they still have a ways to go.  Moreover, due to these negative issues, management has stated that they will suspend their dividend altogether, making PBR the first oil and gas company to do so since the oil price freefall.

Estimates Graph

The graph below shows PBR’s historic price levels against the EPS consensus.  As you can see the estimates have been declining for quite some time.

Declining Estimates

Over the past 7 days, earnings estimates have declined for Q1 15, Q2 15, FY 15, and FY 16; Q1 15 estimates fell from $0.24 to $0.15, Q2 15 dropped from $0.36 to $0.21, FY 15 declined from $1.12 to $0.91, and FY 16 fell from $1.42 to $1.30.

Bottom Line

Petroleo Brasileiro’s new management team has a huge hole to dig themselves out of, and it is not going to be easy.  With a terrible debt to equity ratio, a massive debt, and persistently low oil prices, it will be a while before this company can return to its previous solid performances.

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