NYSE-listed ADRs of the Brazilian state-run energy company Petroleo Brasileiro S.A. or Petrobras PBR gained over 4% in the last trading session. The share price appreciation follows an announcement by Congressman Eduardo Cunha that could prove beneficial for the company.
The Brazilian Congressman stated that the national oil law, which mandates Petrobras to be a part of all subsalt exploration and development activities, will be changed. Per the current law, Petrobras is required to hold a minimum of 30% stake and also act as an operator in all subsalt oil exploration blocks auctioned by the government.
While this gives the company scope for continued production growth, its financials come under pressure. Choosing projects to lead should be interest based and not an obligation for any company.
Petrobras already carries a heavy debt burden and this rule further increases its woes by making investments mandatory. Leverage remains a key area of concern for the firm. Also, the money laundering and bribery scandal has further challenged operations for the firm by scarring its credit metrics.
However, Petrobras is taking appropriate measures to handle its financial concerns. The company plans to take more selective investment decisions and lower exploration investment to a bare minimum in order to check its liquidity issues. The proposed change could prove to be a big support to the company’s cause of lowering investments.
Additionally, the move could bring fresh investments into Brazil’s oil and gas exploration and production industry, thus benefiting the economy at large.
Petrobras is the largest integrated energy firm in Brazil. Currently, the company carries a Zacks Rank #3 (Hold).
Better-ranked players from the broader energy sector include China Petroleum & Chemical Corp. SNP, NuStar Energy L.P. NS and Tallgrass Energy Partners, LP TEP. All these stocks sport a Zacks Rank #1 (Strong Buy).
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