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Why Petrobras (PBR) is Falling Today

NEW YORK (TheStreet) -- Brazilian oil giant Petroleo Brasileiro SA (PBR - Get Report) is falling today, as investors process Friday's announcement that the company will hike its diesel price 8%. At market open, shares had tumbled 10% to $14.35, adding to the company's year-to-date losses of 26.3%.

Petrobras, as it is more commonly known, said it will also increase its price for gasoline 4%. Both pricing policies were implemented at midnight Nov. 29.

The state-run oiler said the reasons for the price adjustment are threefold: to cut losses to the levels described in Petrobras' four-year business plan, to align Brazilian and international prices over 24 months, and to minimize the effects of international price volatility.

The company has suffered more than 30 billion Brazilian reais ($12.8 billion) in losses in less than 2 years as its prices are outpaced by oil's global value. The Brazilian government has resisted increasing the price of Petrobras' goods in an attempt to rein in inflation.

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The price hike will apply only to the amount distributors pay before tax. The government expects consumer prices to increase around 3% as a result. However, details of the pricing strategy have been kept scarce.

"The parameters of the pricing method will be kept strictly in-house for commercial reasons," the company said in a statement.

The increase is the third time this year Petrobras has hiked prices. In January, the Rio de Janeiro-based business raised gasoline prices 6.6% and two months later increased diesel by 5%.

TheStreet Ratings team rates Petrobras-Petroleo Brasilier as a Hold with a ratings score of C. The team has this to say about their recommendation:

"We rate Petrobras-Petroleo Brasilier (PBR) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, largely solid financial position with reasonable debt levels by most measures and notable return on equity. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, poor profit margins and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • PBR, with its decline in revenue, slightly underperformed the industry average of 5.4%. Since the same quarter one year prior, revenues slightly dropped by 6.7%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Net operating cash flow has decreased to $6,274 million or 22.24% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 45.9% when compared to the same quarter one year ago, falling from $2,744 million to $1,484 million.

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