Moody’s Rating Upgrade Turns Petrobras Bullish

Moody’s Rating Upgrade Turns Petrobras Bullish
April 18, 2017

 
After getting hammered to a low of about $3 on account of the corruption scandal, the stock of Brazil’s largest company, Petroleo Brasileiro S.A. (NYSE: PBR), commonly referred to as Petrobras, has more than tripled in the past one year to close at $9.26 last week. One of the main reasons for the stock’s rally is the efforts taken by the Brazilian government to bring in accountability and transparency in the company’s operations. Apart from the rally in the price of crude oil above the $50 per barrel mark, there are few more important facts which suggest the possibility of further appreciation in the stock price. The government of Brazil owns approximately 61% of Petrobras’ voting rights.

Last week, credit rating agency Moody’s Investor Service upgraded Petrobras’ corporate debt rating to B1. All other ratings pertaining to the company were also raised from stable to positive. It is the second upgrade in the past five years and indicates that the overall financial health of the company is improving.

The company lost its investment grade status when the corruption scandal broke out in February 2015. However, considering the disciplined operations of the company, in October 2016, Moody’s upgraded the credit rating of Petrobras to B2, from the prior ‘speculative level’ rating. Lower capital spending initiatives, strong Brazilian currency, rise in oil prices and supportive government ensured a rating upgrade.

The downstream operating margin will also increase with the new pricing policy adopted recently by Petrobras. The company has a debt of $116 billion. However, the annual EBITDA is only about $25 billion. So, in order to reduce debt, the company has slashed its capital expenditures by 25% for the period ranging from 2017 to 2021. The company is also planning to grow its revenue to $100 billion in FY17 by increasing its oil production. Through a series of cost cutting process, Petrobras has reduced its debt by $4 billion since last quarter.

Over the next two fiscal years, the company has to service a debt of $20.1 billion. On the other hand, Petrobras has a cash reserve of $22 billion. The total debt to be repaid in the next five years is $75 billion. So, the rest is anticipated to be raised through the sale of non-core assets, as indicated in the 2017-2022 plan of the company. Another positive aspect is the EBITDA, which remains stable in the range of $24.5 billion to $27.5 billion for the past five years. To break even, the company needs a crude price of $45 per barrel. The recent rally in the crude price would also aid the company’s financial recovery. Thus, considering the rating upgrade and efforts put forth by the company to return to profit, we anticipate the stock to remain bullish.

The price chart indicates that the stock is near the major support level of 9.10. Technically, an oversold situation is also indicated by the RSI indicator. So, considering the possibility of an uptrend, a long position is the most suitable trade at this point in time.

Petrobas - Technical Analysis - 18th April 2017

It would be better to trade a call option contract to gain from the impending rally. Furthermore, it is advisable to invest in the option when the stock trades near $9.30 in the NYSE. The binary trader should also look out for a contract expiring on or around April 26th.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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