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Why You Should Watch the World's Most Hated Oil Company

By Kenneth Rapoza - Jul 7, 2021 at 10:18AM

Key Points

  • The market may have stopped underestimating Brazilian oil giant Petrobras .
  • The company's ubiquity in Brazil and massive reach will likely keep it from vanishing and help it bounce back.
  • The stock has traded in a tight historical range, so be careful when and where you buy in.

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With oil prices rising, and a public health crisis improving in Brazil, Petrobras might be the best oil and gas company in the Americas.

If you invested in Petrobras (PBR 8.96%) during the days of $150 oil and never sold, you lost your shirt -- and probably lost patience with any Brazil-related stock. Collapsing oil prices during the 2008-09 Great Recession, coupled with a massive bribery scandal involving the oil firm, sucked the value right out of Brazil's resident fossil fuel giant. But after years of mistrust, new leadership, and class action lawsuits, happier days are here again. After three months of gains, can Petrobras keep heading higher from here? Here's what you need to know once you add this to your watch list.

3 reasons to fill up on Petrobras

First, Petrobras has strong fundamentals backing it up. Brazil's government supports fossil fuels, and Petrobras owns most of the deep-water oil fields off Brazil's Atlantic Coast. It's in charge of nearly all of Brazil's natural gas production and distribution. Brazil mixes sugarcane ethanol with its gasoline – and Petrobras owns nine ethanol plants .

It's also shedding more bad skin. Class action lawsuits revolving around the bribery schemes known in Brazil as the Car Wash scandal are behind it. On July 1, Petrobras sold its remaining stake in its gas station company, BR Distribuidora, raising around $2.3 billlion . After years as the most indebted oil company in the Americas, Petrobras is paying dividends again, and this sale helps keep its roughly 3.2% yield in place. (For contrast, Colombian oil and gas company EcoPetrol (EC 2.09%) yields 0.63%; ExxonMobil (XOM 0.87%) is 5.52%.)

A hand points to a trading screen, superimposed over an offshore oil platform.

Image source: Getty Images.

Second, Brazil's oil and gas demand is coming back. Exports are up, as Oilprice.com  reported on June 28. Reuters notes that Chinese oil importers love the company ; they've partnered up with Petrobras on multiple lucrative projects

Third, Brazil is clawing back from its worst days of the COVID-19 pandemic, with zero new cases and zero new deaths  reported on both June 29 and June 30. As Brazil returns to normal, there will be more demand for Petrobras oil and natural gas.

The market has been pricing in this good news for weeks now. Petrobras looks strong -- maybe too strong for some value-minded investors who see the company at its highest price in a year.

But long-term investors who don't want to spend a lot of money on energy stocks will definitely like the idea of the commodity super-ish cycle. Oil and timber prices are rising. And still, much of the Western world is facing some sort of economic lockdown. That isn't going to last forever, so investors believe demand for fuel will increase to power economies that finally start firing on all eight cylinders.

But investors who want exposure to global value and key commodities like oil and gas will have to pay attention to Petrobras's price to get the most out of any potential investment.

Why you should wait for a pullback

Petrobras has been trading between roughly $8 and $12 per share since 2016. It slipped to $5 during the beginning of the pandemic in March 2020. In 2018 and 2019, when the U.S. and Brazilian economies were doing very well, the stock hit as high as $16. At current prices of around $11, Petrobras still trades around the high end of its five-year range -- and a lot of its fortunes will depend on global oil markets. If they look bullish, so will Petrobras.

Given its historical performance, buying Petrobras under $10 a share may be your safest bet for a long-term holding. You will need to watch oil markets when it is trading over $12 to see whether investors are convinced oil is going higher. If oil looks like a dud, then Petrobras could easily peter out, making a $12 buy pretty pricey.

Political risk will keep it cheap

We know strong oil and weaker Covid provide great tailwinds for Petrobras. But next year's elections could create serious headwinds, too. 

Incumbent president Jair Bolsonaro faces an uphill battle. At least for now, political observers believe he'll lose his reelection bid to former president Luiz Inacio "Lula" da Silva. Sadly, Lula is the poster boy of Operation Car Wash, the name given by Brazil's version of the FBI to the Petrobras bribe schemes. And while it is highly unlikely that such fraud would begin again , given public pressure against such corruption and all the near-fatal lawsuits Petrobras endured in the scandal's wake, the market could easily crush Petrobras if it thinks Lula will win.

If so, consider that another opportunity to build your Petrobras war chest.  If Petrobras falls to single digits, big Wall Street emerging market funds might start buying. And if history's any guide, Petrobras tends to recover from single digits in time. 

Can Petrobras be a $15 stock again like in 2018-19? I'd argue yes. Solid oil and gas prices and COVID-19 recovery should help Brazil's economy bounce back, strengthening its currency and likely pushing Petrobras share prices higher.

Unless you believe oil and gas will go the way of the wooden windmill, and Brazil will never heal from COVID, (and what Fool believes that?) then Petrobras is a must watch. Keep an eye out for general sell-offs, and be leery of investing at any price over $12 unless oil is approaching $100 and COVID talk dissipates globally.

Fool contributor Ken Rapoza owns shares of Petrobras. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Petroleo Brasileiro S.A. - Petrobras Stock Quote
Petroleo Brasileiro S.A. - Petrobras
PBR
$13.62 (8.96%) $1.12
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$94.00 (0.87%) $0.81
Ecopetrol S.A. Stock Quote
Ecopetrol S.A.
EC
$11.22 (2.09%) $0.23

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

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