Last month, Brazil’s state-owned oil company Petroleo Brasileiro SA (colloquially known as Petrobras) made headlines when it put investors on edge when the company announced a controversial decision to walk back a previously planned price increase on diesel fuel. A few days later, in what was seen as an effort to win back the market’s trust, Petrobras announced they would go through with the price rise after all, but the damage to their stock value was done. One of the country’s best-performing hedge funds, however, saw the lowering value of the oil company’s stock as a major investment opportunity. In fact, while many other investors have shied away, Petrobras has become the single biggest holding of the XP Long Biased fund.
In mid-April Petrobras abruptly cancelled a diesel price hike citing concern for the country’s disgruntled truckers, who brought South America’s largest economy to a grinding halt last year when they went on strike in protest of high diesel prices, resulting in “10 days of chaos” and the forced resignation of unpopular Petrobras CEO Pedro Parente. The strike came amid outcry from Brazilian president Jair Bolsonaro, who publicly took the side of Brazilian truckers calling for “fair prices”. The most recent strike echoes concerns of last year’s protests, as well.
This move on the part of Petrobras gave investors serious cause for concern, casting doubt over whether the state-run oil firm was being guided by political influence. Investors have good reason to be wary, according to reporting by Oilprice, as the state-run oil company has historically underpriced its products and allegedly sold fuel at a loss for years under pressure from previous governments. Related: Stocks Slip As Trump Ramps Up Trade Deal Rhetoric
Despite President Bolsonaro’s campaign trail promises to toe the line with “orthodox economic policies” the far-right ex-military president’s first 100 days in office have indicated a different reality in which the “more populist factions in his government may have an upper hand over free-market voices”. In the wake of the Petrobras decision to cancel diesel price hikes, preferred shares in Petrobras saw their biggest drop in nearly with an 8 percent decrease. Further comments in defense of the Petrobras decision made by Bolsonaro sent shares even lower. “I’m not an economist. I already said I didn’t understand the economy. Those who understood economics sunk Brazil, right?” Bolsonaro was quoted to say to a group of journalists in Macapa. He continued, “I’m also worried about cargo transport in Brazil, about the truckers ... We want a fair price for diesel.”
Seeing the damage done, Petrobras quickly reversed their decision to cancel the diesel price hike, but for many investors the damage to Petrobras’ reputation was done. As Petrobras stock value slid, however, one of the best-performing hedge funds in Brazil doubled down on the buyers’ market, snapping up shares as other investors backed off. “Joao Braga and Marcos Peixoto, who manage US$ 1.3 billion (5 billion reais) at XP Asset Management, have increased their stake in Petrobras”, reported Uruguayan news agency MercoPress, “making it the biggest holding of their XP Long Biased fund even as the oil producer’s rally has outpaced the benchmark.”
Explaining his strategy in an interview with MercoPress, Braga said, “The stock is cheap[...], management is good, the company is deleveraging and there are the asset sales, which will be good for the company.” While Braga and Peixoto acknowledge that leaning into Petrobras is not without its risks, as future volatility such as the dip seen from the diesel decision is always a possibility, they nevertheless believe that Petrobras is greatly undervalued. “The duo see Petrobras trading at less than four times enterprise value to earnings before interest, tax, depreciation and amortization at current oil levels, compared to six times historically”, reports MercoPress.
As Braga sees it, “that means even if oil goes down, Petrobras doesn’t have to go down, because it has a lot of fat to burn.”
By Haley Zaremba for Oilprice.com
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