Case Study: Petrobras

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Petrobras SA
Petrobras released its fourth quarter and full year 2015 results on 21st March. The company has made some progress on adjusted basis through 2015 although on a reported basis its net loss increased by 15 % in USD terms over 2014 to US $ 8,450 million. The major cause of the increase was impairment of assets and investments, generated by decreased crude oil prices and by higher discount rate, attributable to an increase in Brazil’s risk premium, resulting from a credit risk downgrade (losing its investment grade status) (US $ 12,849 million). Another big contributor to the increase in reported net loss was the interest expenses and foreign exchange loss amounting to US $ 9,853 million.
Otherwise, the operating loss decreased from US $ 6,963 million in
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Hence, it could more than nullify any progress that the company claims to have made in terms of reduced losses, increased cash flows and margins and improved efficiencies. Petrobras now faces a Herculean task of turning around the company which has deep ethical issues that take years to get resolved and show any positive effect.
For the short term, some investors might be hopeful of a bailout by the Brazilian government. But you don’t go out to bet on a bailout kind of thing in the stock market. Further, a bailout is a far-fetched possibility at present. And even if a bailout does happen, the common shareholders come after the more preferred claimants especially the banks and bondholders. And the net debt stands at over US $ 100 billion and the total debt represents 54 % of total assets. So unless we get more clarity on this case, we can’t have an optimistic view on the company. Therefore, it is advisable for equity investors to stay away from this stock till at least the investigation is

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