What happened
Shares of Brazilian oil giant Petrobras (PBR 2.51%) plunged today, down 11.6% in Monday trading. The unique sell-off when compared with other oil stocks, most of which were up today, is likely due to unrest within the country ahead of the Oct. 30 runoff presidential election.
The Brazilian government owns about 37% of Petrobras, but controls just over half its voting rights, so the fate of the company is inextricably linked with Brazilian politics. On that front, an incident last night may give a bigger advantage to Luiz Inácio Lula da Silva, the left-wing candidate, in the upcoming runoff election. In investors' eyes, that would be an incremental negative for Petrobras.
So what
News reports say that last night, Roberto Jefferson, an ally of President Jair Bolsonaro, shot a rifle and threw a grenade at police officers trying to arrest him. Police were reportedly ordered to arrest the former government official after he violated house arrest, under which he was put after making offensive remarks and threatening a Supreme Court Justice, and spreading misinformation about election integrity. Two police officers were injured.
Having one of your supporters involved in this type of violence is probably not a good look when you are running for re-election. While Bolsonaro condemned the attack and said anyone who fires on police should be put in jail, it's probably not increasing his chances in Sunday's runoff.
In the first round of voting earlier this month, Lula beat Bolsonaro 48.4% to 43.2%. That result was actually closer than forecast, and since no candidate earned more than 50% of the vote, the election will go to a runoff between the two candidates.
It appears investors believe last night's incident will tilt the election toward Lula and that that could be a negative for the oil giant. Investors may be worried that, under Lula, the government may insist on more uneconomic capital expenditures to increase supply or that there could be price controls below what market dynamics would dictate.
Now what
Despite investors' misgivings, Brazil is incentivized to have a healthy national oil company. Meanwhile, it appears a lot of risk is priced into Petrobras shares, which trade at just over 3 times earnings.
That type of mouth-watering valuation is bound to attract some value investors, especially with oil prices still up around $85 per barrel. Still, those interested should probably be familiar with Brazilian politics, and have an informed opinion on what kinds of actions Lula might take if he is elected next week. If those actions are not as bad as feared, the stock could soar once again.
