Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Petrobras Climbed 34.6% in October When the Rest of the Market Dropped

By Maxx Chatsko – Nov 8, 2018 at 12:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors grew increasingly optimistic about Brazilian stocks in the wake of the country's presidential election, but third-quarter 2018 earnings challenged that excitement.

What happened

Shares of Petrobras (PBR 0.74%) rose over 34% last month, according to data provided by S&P Global Market Intelligence. The oil major has been much more volatile than peers in recent years thanks in large part to the uncertainty caused by operating in its home country of Brazil, which has experienced a number of growing pains including economic and political turmoil. But in October, that national affiliation helped the oil and gas producer escape the volatility of the broader U.S. stock market.

Voters went to the polls twice in October and elected far-right candidate Jair Bolsonaro as the next president of Brazil. His election marks a sharp departure from the recent string of politicians that have held the country's highest office (and the now-infamous bribery scandal involving Petrobras likely helped with that), but Wall Street is hoping he delivers on his business-friendly agenda. That would especially help the oil major as it seeks to bring in foreign investment and accelerate growth.

However, the company's recent third-quarter 2018 earnings report shows nothing is guaranteed when it comes to the ongoing turnaround.

An offshore oil platform in Brazil.

Image source: Getty Images.

So what

Petrobras delivered mixed operating results during the third quarter of 2018. The energy leader continued to show progress in deleveraging its balance sheet by selling off noncore assets. Net debt shrank to "only" $72.9 billion at the end of September, which is a solid improvement from the $84.9 billion carried at the end of last year. 

The oil major also benefited from higher crude oil prices that helped pump up quarterly net income to $1.7 billion, compared to just $71 million in the year-ago period. But analysts still observed some worrying trends. 

For instance, Petrobras delivered free cash flow that was nearly 50% lower than the second quarter of 2018, as it increased capital spending in an attempt to offset declining oil production. Compared to the year-ago period, production dropped 13%, which has some analysts concerned about the near-term ability to grow out of a downright awful balance sheet.

Now what

Petrobras stock may have received a jolt from Brazil's presidential election, but the business' fate is largely dependent on internal efforts to profitably grow production and clean up its balance sheet. Investors should also consider that president-elect Bolsonaro will more likely become the source of added uncertainty rather than predictable policy going forward. That could make October's stock price improvement short-lived.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
$12.25 (0.74%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.