Oil Producer Petrobras Is on the Rise, But It Is an ADR to Avoid

For many energy companies, the pendulum has swung both ways in the past two years.

The pendulum has been swinging in the right direction for Petroleo Brasileiro, commonly known as Petrobras (PBR) , with American depositary receipts of the company up more than an eye-popping 186% this year.

Recent strength for the ADR is the result of the company's first credit rating upgrade in five years by Moody's Investors Service. The upgrade was likely prompted by a combination of a perceived decline in liquidity risk, Petrobras' increased autonomy over its pricing policy and the unveiling of the company's 2017 to 2021 business plan.

The Brazilian government owns a majority of the company, so the upgrade also reflects improving sentiment about the country's economy. President Michel Temer is trying to restore Brazil's sinking public finances and overcome the effects of the worst recession in more than a century.

The company's broad cash generation and asset sale targets are ambitious. However, while the appreciation of the Brazilian real has helped cut costs, the high risk of execution challenges could put a damper in asset sales, and Petrobras needs to sell some assets.

Petrobras is the world's most indebted oil company, with a debt load of $125.51 billion.

For next year and in 2018, the company's maturing debt comes in at a cumulative $22.4 billion. And the company is also contending with a class action, an investigation by the Securities and Exchange Commission, and a Department of Justice probe, all of which could result in hefty fines.

If you liked this article you might like

The Retail Apocalypse Is About to Descend on Wall Street This Coming Week

Former Petrobras CEO Bendine Arrested in Bribe Probe

Pirates Step Up Attacks on Petrobras Refineries in the Amazon

Petrobras Stock Jumps on CVM Decision, Lula Conviction

Former Brazilian President Lula Gets 9 Years For Corruption