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Petrobras' New Pricing Hurts Shares

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Shares of the Brazilian state-run energy giant, Petroleo Brasileiro SA, or Petrobras (PBR) slipped almost 11% since opening on Monday on news of its new pricing policy. The company had announced plans to increase gasoline price by 4% and diesel price by 8% effective Nov 30 onward.

Petrobras announced of the price hike as a measure to lower its leverage, bringing it down to the permissible limit according to the Business and Management Plan 2013–2017 and better align Brazilian oil prices with international prices. Once implemented, the company should see improved margins.

However, the news backfired as shares dropped substantially. The hike, permitted for the first time by the government since Mar 2013, fell below expectations.  It is unlikely that this price hike will bridge the gap to reach the break-even point in the company’s downstream operations. The government’s continued intervention in deciding the fuel prices had negative effects on the company’s financials. Moreover, any further hike seems unlikely till the Brazilian Presidential elections in October next year and inflation runs high. The transparency behind the policy is another questionable matter and reflects investor sentiment.  

In the third quarter, the company reported a net income of $1,484.0 million, down approximately 46% from the prior-year quarter. Fuel prices were a significant contributor to the weak results. Petrobras sells imported gasoline at a lower price than the international market price and ends up incurring a loss. Petrobras’ attempts to streamline cost seem to have lost steam and such minor increase in fuel prices is unlikely to generate desirable results.  

Headquartered in Rio de Janeiro, Petrobras currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can consider better-ranked energy sector stocks like Matador Resources (MTDR), SM Energy Company (SM) and Harvest Natural Resources Inc. (HNR). These stocks currently sport a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on SM
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Read the Full Research Report on HNR

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