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Petrobras (PBR) Thrown into Disarray on CEO Parente's Exit

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Petróleo Brasileiro S.A. or Petrobras’s (PBR - Free Report) shares have declined more than 20% in the mid-day trading to eventually close at $10.13 (14.6% down) on Jun 1, after the company’s CEO Pedro Parente stepped down from his position. Following his resignation, the Brazilian real also weakened against the dollar, sparking fear over the country’s economy. The CEO’s resignation came in the wake of the nationwide trucker strike in Brazil, which had strangled the country’s economy for more than a week.

Why Did Parente Quit?

From 2011 to 2016, while Petrobras’ policy to offer fuel subsidies to its consumers helped to keep Brazil’s inflation in check, it also caused the company to bear severe losses and limit its long-term prospects. However, with Parente taking charge as its CEO from May 2016, the subsidies got lifted and the company adopted new free-market fuel policy that followed international markets closely, and helped Petrobras to operate more efficiently.

Though this market-based fuel pricing policy helped the company restore its financial credibility and was appreciated by the investors, it was highly criticized by the truck drivers of late, especially in the light of the rising global oil prices. The global oil price rise led to an increase in the fuel prices in Brazil, creating discontent among the consumers.

This spurred a nation-wide strike against the diesel prices by the lorry drivers in the country since May 21, 2018, leading to huge disruption and major shortages of products from food to gasoline. The strike paralyzed the transportation and logistics of the country, creating serious problems for various services and industries.

In an attempt to resolve the truckers’ strike in Brazil, the government intervened on May 23 to temporarily lower diesel prices at the pump by 10% along with freezing the prices for 60 days.  

Parente believed that the strike had challenged the implemented pricing policy, which is depicted in a statement during his resignation. Per the statement, his role “as CEO had stopped being positive and the government needed to consider alternatives to its pricing policy going forward”.

While the trucker representatives have consented to put an end to the strike, Petrobras’ pricing policy is under immense scrutiny now and it’s a wait and watch story whether or not the company will be allowed to resume its policy of benchmarking international oil prices.

Notably over the past two weeks, the company’s shares have tumbled about 30%, as the shareholders feared state intervention in the company’s policies, which could put an end to the recent more profitable investor-focused policies.

Parente Credited with Petrobras’ Turnaround

Parente took the help of Brazilian oil giant, Moody’s in May 2016, which was grappling with huge debt levels, mismanagement and money-laundering scandals. In Feb 2015, Petrobras lost its investment grade at Moody’s due to severe corruption charges against the company.

Many of the company’s officials were arrested as part of the Operation Car Wash investigation. The bribery scandal also resulted in the imprisonment of the former President of Brazil, Luiz Inacio Lula da Silva. In February 2016, the company was downgraded to the lowest speculative level.

With Parente taking over, he made laudable efforts to breathe new life to the company; leading Moody’s to upgrade the company’s ratings to B2 in October 2016, courtesy of debt-refinancing transactions and disciplined operational management.

Parente focused on shifting the state-controlled company’s strategy away from the government interests, toward more free-market policies and business-oriented strategies. Parente’s leadership helped the company adopt new profitable fuel-pricing policy, allowing the market to decide on the prices of fuel, thus boosting the margins of the company.

Under the leadership of Parente, the world’s most indebted oil company began making successful attempts to trim its debt load and achieve operational efficiencies. At the end of the first quarter of 2018, Petrobras’ net debt stood at $81,447 million, depicting a significant decrease from $96,381 million as of Dec 31, 2016. In fact, Petrobras generated free cash flow of $13,850 million last year — up 12% year over year — reflecting operational improvement and lower investments. Notably, in the last reported quarter, the company reported its highest quarterly profit in the last five years.

Parente’s aggressive asset-sale programs have also been much appreciated. The company’s divestment program of $21 billion throughout 2017-2018 is expected to support debt reduction. His focus on Brazil’s pre-salt reservoirs to boost the production profile of the company boded well. During his tenure, Petrobras inked deals with major players like TOTAL S.A. (TOT - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) and Statoil ASA to drive its exploration momentum.

His successful turnaround strategies helped the company reinvigorate, with its shares rising more than 71% in the past two years, outperforming the broader industry’s rally of 56%.



 

What Lies Ahead?

Ivan Monteiro will be serving as the interim CEO after Parente’s resignation. Monteiro has been the CFO of Petrobras since 2015, supervising the company’s successful debt-reduction attempts. He had also led the initial public offering of the company’s fuel-distribution unit, Petrobras Distribuidora S.A. that managed to raise $1.5 billion.

The departure of Parente has definitely raised speculations that the country may resort back to its old fuel pricing of subsidies that may again hamper the Zacks Rank #3 (Hold) company’s growth and economy.  You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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