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Petrobras Q1 Earnings Strength Put These ETFs in Focus

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Brazilian state-run energy giant Petroleo Brasileiro S.A. or Petrobras (PBR) reported first-quarter 2015 results on May 15. The company reported first-quarter 2015 earnings per share of 14 cents (down from 17 cents in year-ago period) which breezed past Zacks Consensus Estimate of 8 cents. Its revenues of $25.97 billion, though down 24.7% year over year, surpassed the Zacks Consensus Estimate of $29.79 billion.

Reduced cost of sales on lower oil and related product import costs (as noted by the management) can be considered the key to the success. This appears to be a huge achievement for Petrobras considering that the company has long been a laggard in Brazilian corporate backdrop. Prior to first-quarter 2015 earnings, the company’s average earnings surprise for the last four quarters was negative 20.24% (read: Petrobras Earnings & Scandal Drag Brazilian ETF Lower).

The company is the largest publicly traded Latin American oil company and is leading Brazil’s oil and gas sector. The Brazilian government, with a high stake in the company, has a history of political intrusion in Petrobras’ issues. Moreover, a bribery scam involving high-profile officials at 2014-end added to its woes (read: Will Brazil ETFs and Petrobras Breathe Easy After the Election?).

The turnaround story began from Q4 of 2014 itself when the company posted an impressive 157.14% positive earnings surprise. The latest earnings report was only an icing on the cake. As per Financial Times, the drop in global fuel prices lent a hand to Petrobras which underperformed massively in a rising oil prices environment in early 2014.

Per the Financial Times article, the company was compelled to import fuel and put it up for sale at discounted prices in Brazil in recent years to contain the country’s soaring inflation. Owing to the fuel subsidies, Petrobras lost about R$60bn during 2011 to 2014, per FT.com.

Market Impact

Thanks to this optimism over the company, shares of Petrobras climbed over 8.3% in after marker hours on May 15 on elevated earnings. The stock was up over 2% during the trading session (read: Best and Worst ETFs of April).

Investors should note that the stock jumped nearly 39% so far this year versus about 3% gain for the S&P 500 index in the same timeframe. PBR shares recouped most of the losses incurred last year.

Investors seeking to make a play on this turnaround story might look to ETFs having a higher allocation to this oil giant. Below we have highlighted some of these that would be in focus in the coming days (see all Latin American Equity ETFs here):

iShares MSCI Brazil Index Fund (EWZ)

The fund has close to $3.4 billion in AUM and trades more than 16 million shares a day. The in-focus stock is the fourth largest holding of the Brazilian ETF with 5.2% exposure. The fund charges 62 bps in fees and is up 1.55% so far this year. However, the fund has a Zacks ETF Rank #4 (Sell).

iShares Latin America 40 ETF (ILF)

This ETF gives exposure to big Latin American companies, though it is heavy on Brazil which has over half of the basket. The fund has amassed about $767.5 million in assets while it trades at volumes of over 500, 000 shares a day.

Petrobras takes the sixth position in the fund with about 4.6% focus. The fund charges 49 bps in fees. Investors should note that ILF is low on the energy sector as it takes just 10% of the portfolio. The fund is tilted toward the financial sector. The fund is up 3.8% so far this year. The fund has a Zacks ETF Rank #3 (Hold).

Revenueshares ADR ETF (RTR)

This is an overlooked choice as it has accumulated assets of $27.6 million so far. The RevenueShares ADR Fund looks to track the S&P ADR Index. The fund invests about 3.8% in PBR which is its fifth holding. RTR costs investors 49 bps in fees. So far this year, the fund has returned over 10%.

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