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Brazil’s Petrobras: A Buying Opportunity?

The disappointing choice of Banco do Brasil chief Aldemir Bendine to head Brazilian oil company Petrobras has led to more negative sentiment on Petrobras, Brazil and the Brazilian markets.

Brazilian stocks and bonds, including those of Petrobras, are trading at some of the cheapest levels ever, reflective of both the country’s problems—slow growth, a sharp decline in investment, currency woes, among others—and those that are endemic to Petrobras. Choosing Bendine, who the market perceives to be close to Brazilian president Dilma Rousseff and the ruling party, is likely to make things worse for both Brazil and Petrobras, which, among others, has an extremely high debt burden and badly needs fresh investment, said Charles Sizemore, Chief Investment Officer of Sizemore Capital Management in Dallas. At the same time, though, the company’s bonds are trading at the kind of spread levels that could possibly interest some investors, and its equity is also attractively priced at one-third book value, Sizemore said.

“The bonds are trading pretty wide spread and there is reason for that, the doubt being ‘will they be repaid,’” he said. “And if Petrobras doesn’t get its books in order in the next four months, they will be in technical default, but I would imagine that it isn’t going to get to that, that the Brazilian government will, if it comes to it, step in and bail them out. Which means that for speculative investors, your risk of losing is probably pretty modest, as the Brazilian government will make you whole.”

Ditto on the equity side: Petrobras’ stock is currently trading near a 52-week low, Sizemore said, “so if you believe the price of oil will at least stabilize, that Dilma may not be president for too much longer -- since an unresolved corruption scandal could make things worse for her – and there will be a new face at the top, you could take bets because Petrobras is interesting at current prices.”

Sizemore sees Petrobras as a five-year bet and he is currently invested long in a basket of Brazilian stocks as well as in some Brazilian ETFs.

“I like Brazil as a contrarian value play even though there is a lot of headline risk associated with the country,” he said. “There’s no doubt it’s a country with a lot of problems but its stocks are very cheap right now and you’ve got to believe that at some point, the bad news will all be priced in.”

Eric Linser, an independent wealth advisor at Avant-Garde Advisors in San Francisco, has owned Petrobras in the past and even now, he’s looking at the company as a potentially interesting investment. However, “I think it's premature to invest in the company and I would need to see some catalysts that there is true reform underway, away from the governmental ties of the company's history ultimately leading to the corruption we've witnessed,” Linser said. He compares Petrobras to Pemex, Mexico’s state-owned oil company, which, he believes, shows better metrics for investment. Pemex has benefited from the energy reform in Mexico that has opened the sector up to private investment, domestic as well as international, in the hopes of beefing up Mexico’s lagging oil and gas production. With a reform-minded president in charge, Mexico is also a strong market overall, and “I believe that Mexico's stock index will outperform that of Brazil's in 2015, Linser said.

“Until I see true reform and a move to capitalism and away from socialism, I'm on the sidelines for Brazilian investment, even if there are always a few companies that can overcome the hard times and do well, and for that I will continue to invest in Brazilian companies opportunistically,” he said.

For Petrobras, fresh investment, foreign direct investment in particular, is an urgent and pressing imperative, since the company’s biggest oil reserves are located in expensive and hard-to-explore offshore fields, which would be a problem even without the corruption scandal, Sizemore said. It does not look as though the scandal will be cleared up anytime soon, so with the company still closely linked to the Brazilian government, “I’m not sure any foreign oil company wants to partner with them,” he said. “Petrobras is a mid-sized oil company and yet it has one of the highest debt burdens of any oil company in the world.”

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