Things have not been great for oil companies. Lower prices have hurt the industry with little hope of a recovery until the market recovers.
In this clip from the Industry Focus: Energy podcast, Sean O'Reilly and Taylor Muckerman take a deeper look at two oil companies they don't usually focus on: Petrobras (PBR 2.85%) and Vale (VALE 0.16%). Listen in to find out why Petrobras -- which was a highly desired stock pre-financial crisis -- has had such a downtrend roller coaster of a chart in the last five years. You will also hear the pair discuss what the "carwash scandal" entailed and why it's hurting Petrobras so badly. In addition, you will learn what's hitting Vale the hardest and why long-term investors will want to stay away from both stocks.
A transcript follows the video.
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This podcast was recorded on Jun. 2, 2016.
Sean O'Reilly: We wanted to chat today about Brazilian commodity producers, particularly Petrobras and Vale. The chart on Petrobras alone is brutal.
Taylor Muckerman: Oof!
O'Reilly: High of $76.60 in 2008. Just a nice, downhill slide ever since.
Muckerman: It was a darling back then. Everyone was clamoring to get some.
O'Reilly: Leading up to the financial crisis, yeah.
Muckerman: Yep. Everyone was clamoring to access offshore Brazilian oil.
O'Reilly: They actually have a lot of oil. 8.7 billion barrels of crude, 10.4 trillion cubic feet of natural gas.
Muckerman: Sounds like big numbers, and it actually is, comparatively around the world. It's not a No. 1 or No 2 reserve holder, but it's an important factor.
O'Reilly: It's sizable, and we need it.
Muckerman: Yeah. Without it, we would be in dire straits.
O'Reilly: In 60 seconds, can you give our listeners a rundown of the plethora of corruption problems that Petrobras... Feel free to take a minute and a half, if you want.
Muckerman: The one in particularly that we're discussing today has really been going on since 2014, in terms of investigation. Dubbed "the carwash scandal."
O'Reilly: Why does it have that name?
Muckerman: They're trying to scrub the government? I don't know. Anyway. You're talking about vendors overcharging Petrobras for some of the supply and the equipment.
O'Reilly: And these are vendors that the government requires Petrobras to work with, because it's partially state-owned.
Muckerman: Not partially. It's majority state-owned. There's a mandate in there that they have to use a certain amount of local vendors. Then, on top of that, they have to sell oil at a subsidized price, they have to buy internationally, sell it domestically. They're really getting screwed over on the margin side.
O'Reilly: And all of this was OK, pre-financial crisis. Oil went up there and gave $140 a high five, as I recall. So all that was OK back then, because oil was $140.
Muckerman: Well, it was on the development side, but when you have oil prices that high, and it's producing its own oil, it couldn't sell its oil to the refineries in Brazil. It had to go out and buy oil on the open market and sell it at a subsidized price to the domestic market.
O'Reilly: Oh my gosh! How is this a good idea?
Muckerman: Well, for the government, it seemed like it. For the company and investors, obviously not.
O'Reilly: Right. I'm at risk of being a stereotypical American here or something, but why not just let it do its thing, make money, and tax it heavily or something?
Muckerman: Let capitalism do its thing? I don't know why. Same thing with Vale. It's partially government-owned.
O'Reilly: Are they nearly as corrupt? What happened there?
Muckerman: I don't believe there's as much corruption, at least, that's been announced.
O'Reilly: Iron ore is just in the tank?
Muckerman: Yeah. You see the troubles of an entire country, especially the size of Brazil, being so heavily reliant on materials and...
O'Reilly: They were doing well. Do you remember, Warren Buffett actually made a currency trade, which he never does, and he bought the Brazilian real. That was -- I'm trying to remember -- I think 2007 or something. Anyway, times change. I read something earlier, and it was like, "Petrobras' corruption scandals are probably in the past." You don't necessarily agree with that, though?
Muckerman: No. Maybe within the company, but you're already seeing new discoveries or new rumors that new officials in the government are trying to undermine the probe. You've seen the government change hands in the last couple months, after the ouster of their former leader. Now, his newly appointed cabinet members are already suspected of trying to undermine this probe. I think we're still a couple years...
O'Reilly: Do they own car washes?
Muckerman: I have no idea. I don't think there's enough water right now in Brazil. With all the hydro-power they need, especially with the Olympics coming up, there's probably water restriction on car washes.
O'Reilly: Oh, that's right! The Olympics are there! Oh, boy.
Muckerman: Thankfully, it's only in one city, so it might not be as disjointed as the World Cup was, even though that seemed to have gone off without a hitch. At least they can only concentrate on one area, rather than sending Americans on the longest route possible to try and win the World Cup.
O'Reilly: OK. So, bottom line for Foolish investors, I hear all this stuff and I'm like, "This sounds stressful. I don't need this."
Muckerman: You don't need it. If you're a long-term investor, you don't need it, you don't want it. Therefore, I wouldn't recommend investing in it.
O'Reilly: Would you take either of these names if we gave you shares?
Muckerman: Yeah, I would take them.
O'Reilly: Then you'd sell them?
Muckerman: They've been beaten up so badly. And if they're given to me, whatever. I wouldn't sell them right away. I'd probably give them a chance, but I wouldn't put any more money.
O'Reilly: But even at what might be a bottom for iron ore and Vale and oil and Petrobras?
Muckerman: That's the thing. You're still trying to call a bottom. Oil was above $100 for most of the time since 2008, and we've seen the share price...
O'Reilly: You're absolutely right.
Muckerman: With all the government mangling not only in possible corruption but also in the financials and their operations, I just don't see the benefit. The reward could be great, but it's going to be a stressful ride.
