On Nov 27, 2014, we issued an updated research report on Petroleo Brasileiro SA or Petrobras (PBR). Recently, the Brazilian integrated company postponed its third-quarter 2014 earnings release amid intensifying tensions surrounding a multibillion-dollar money laundering and bribery case. Moreover, plunging crude oil prices have been impeding the company’s upstream operations to a great extent.
These are reflected in Petrobras’ current Zacks Rank #5 (Strong Sell), implying that the stock is expected to significantly underperform the broader U.S. equity market in the next one to three months.
Renato Duque, Petrobras’ former director of engineering and services, and 27 other employees were held guilty under the abovementioned case. Petrobras will take into account the outcome of the internal investigations for making necessary adjustments to its third-quarter earnings, which are expected to be released by Dec 12. But the incident has definitely raised questions regarding the company’s operational integrity.
Moreover, Petrobras’ deep-sea pre-salt reserves comprise fields located at water depths of over 2,000 meters, and also 5,000 meters below sand, rocks and salt – making exploration technologically complex, challenging as well as expensive. As such, the success of these projects faces considerable uncertainties and financial risks. Adding to the woes, a weak crude pricing scenario further hampers the company’s exploration and production activities in these reserves.
Key Picks in the Energy Sector
One can consider better-ranked players in the sector like Murphy USA Inc. (MUSA), Sandridge Mississippian Trust II (SDR) and SandRidge Mississippian Trust I (SDT). All the stocks sport a Zacks Rank #1 (Strong Buy).
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