Petrobras (PBR.A) Stock Falling Today Amid Lower Brent Prices and Downgrade - TheStreet

NEW YORK (TheStreet) -- Shares of Petrobras (PBR.A) are down 2.25% to $6.07 Thursday afternoon, as Brent crude future prices trade below $61 a barrel due to the dollar's sharp rise compared to the euro, according to Reuters.

Brent crude for April delivery is down 0.31% to $60.33 a barrel as of 1:46 p.m. ET today.

Earlier today, European Central Bank President Mario Draghi focused on improved growth prospects as he unveiled some of the details from the more than 1 trillion euro bond buying plan, Reuters added.

Separately, Deutsche Bank also downgraded the Brazilian, state-owned oil and gas company to "hold" from "buy" and lowered its price target to $9.70 from $12.70.

"A rapid devaluation of the Real, down 12.1% year-to-date, on the back of challenging economic conditions and an emerging political crisis in Brazil, combined with a relatively stronger international crude prices, up 9.1% year-to-date, has resulted in a more rapid than expected convergence of domestic gasoline and diesel prices in Brazil with the import parity," Deutsche Bank said.

A risk that Petrobras will resume subsidizing the Brazilian economy is increasing, which simultaneously reduces the visibility of the longer-term cash flow outlook for the stock, analysts warned, and in light of this policy threat, they downgraded.

The Deutsche Bank report cites these key risks:

    As an oil and gas producer, Petrobras is susceptible to general commodity price risks.

    The company is exposed to risks of the on-going Lava Jato corruption probe. Our current forecasts do not include any possible financial effects of this investigation.

    Petrobras is heavily regulated by the Brazilian government, and there is a risk that future policy decisions will be more negative than we forecast.

    Upside risks include higher than expected production growth and a more benign local pricing environment in Brazil.

    The repercussions of the company's fate could be far-reaching in the Brazilian economy, as the government is reportedly looking into including a set of anti-corruption rules in the ongoing investigation that would require all companies involved to have the same level of transparency as a publicly traded company, according to the influential daily Folha de S. Paulo.

    In essence, in failing to prevent the scandal, the government has become "a hostage" of the proceedings, according to an editorial published today in another daily, O Estado de S. Paulo.

    The stock is down over 44% from a year ago, which makes one wonder if the weakness is an opportunity for an attractive entry point.

    Sham Gad, a contributor for TheStreet's RealMoney.com recently wrote 'Two Tempting Stocks You Should Avoid,' in which he detailed the dangers of getting into the stock.

    Here's a snippet of what he had to say:

    "I've commented frequently on investing in businesses trading at 52-week lows or at historically low prices. I've discussed the merits of buying into companies at points of maximum pessimism. But I've also highlighted the caveat that one should be careful when investing in this manner so as to not confuse opportunity with value trap.

    There are some opportunities today that look like incredibly attractive long-term bets -- and they indeed may be -- but the risk is just not worth it. I'm willing to lose 5% to 10% of my capital if there is a compelling case that the upside is 100% or greater. However, taking on a risk of 20% or more for the same return is not an attractive bet in my view.

    One stock in this category is Brazilian energy giant Petrobras (PBR). Trading under $7, the stock is down from $21 a year ago. Years ago, the company was valued much higher. It looks awfully attractive, trading at 6x earnings as well. Over the past several months, the company has been rocked by a bribery scandal that now appears to involve international investors. Last week, the CEO and five other senior executives left the company.

    As Petrobras is controlled by the state, one may be tempted to assume that in the end, Brazil will do what is necessary to save it. That's likely true, but saving the company does not mean protecting the public equity holders, who are minority shareholders in this case. So while shares may double in the year to come, the downside is fraught with so many uncertainties. The biggest of those is the fact that there are no defined laws that will protect the equity holder."

    -Sham Gad, 'Two Tempting Stocks You Should Avoid' originally published 2/10/2015 on RealMoney.com.

    Want more information like this from Sham Gad BEFORE your stock moves? Learn more about RealMoney.com now.

    Separately, TheStreet Ratings team rates PETROBRAS-PETROLEO BRASILIER as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

    "We rate PETROBRAS-PETROLEO BRASILIER (PBR.A) 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 revenue growth, attractive valuation levels and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, weak operating cash flow and poor profit margins."  

    You can view the full analysis from the report here: PBR.A Ratings Report