Is Petrobras’ Decline Government-Inflicted?

Photo of author

By Jacob Maslow

brazil oil dredgeThe problem with a high degree of government intervention in a private industry is the market distortions and value twisting it creates. It is always a bad idea for government to dictate a private company’s operations, especially if that company is selling shares in public markets. This is what is definitely at play with Petrobras.

Brazil is going through stagflation right now. Inflation is picking up while economic growth is slowing down. Petrobras is one of Latin America’s largest oil companies, and it has to operate with a lot of government intervention and meddling. The CEO of this company has only so much room to maneuver. At the very least, all company decisions have to pass through political filters to assure that it doesn’t run afoul of the government.

Given such a bureaucratic minefield, it is no surprise that Petrobras’ CEO quit. Grace Foster was either forced to resign or left voluntarily. At the end of the day, it doesn’t really matter. A lot of people were hopeful that somebody competent and with a forward vision can take over. Unfortunately, the news that the head of Banco Do Brasil, Aldemir Bendine will be taking over the top job didn’t really do much to give investors confidence.

Think about it, the president of a bank taking over an oil company. Does that even come close to making sense? These two industries are so completely different from each other. It is really no surprise that Petrobras’ stock didn’t react positively to this development.

The reality is that Petrobras, with the way it is regulated and the way it is forced to run, is political in nature. Not surprisingly, a lot of what ails the company, especially in light of the global crash in oil prices, doesn’t look good for the company’s prospects. Expect this company’s stock to either go nowhere or continue to sink. For the most part, Petrobras’ stock future is linked to the overall health of the Brazilian economy as well as oil prices. Looking at both factors, it doesn’t look like there is much of an upside in the short-term, barring the entry of a truly industry-qualified and industry-specific CEO.

Images Courtesy of DepositPhotos