The down and upside for Petrobras

Petrobras (PBR, quote) was down almost 3% in the premarket on Tuesday as global fears pushed oil and emerging market stocks lower. 

Image courtesy Nestor Galina: http://www.everystockphoto.com/photographer.php?photographer_id=28625

Petrobras Taladro2 rig in General Roca, Rio Negro, Argentina

The shares passed into oversold territory on the relative strength index, a technical signal of momentum last Thursday at a price of $23.05 but have come down another 2.7%.

The stock, along with many other Brazilian shares, has been hit hard over the last year, falling 36.7% from its 52-week high. With a valuation of approximately 8.5 times trailing earnings, investors are trying to find a floor in the shares.

The price of oil has come down more than 12.5% over the last couple of months but is still well above lows set last year. A further escalation of European distress or softening of the U.S. recovery will drive prices even lower.

With the price of brent crude below $120, there is little chance the government will allow an increase in fuel prices to domestic buyers, an issue that has plagued the company recently.

Petrobras’ CEO, Maria das Gracas Foster, told the Brazilian Congress recently that share prices would recover in the coming months on an increase in drilling rigs and reserves. This may be impeded by Brazil’s content laws, requiring that 60% of rig or ship values come from domestic production.

Shares are above their 52-week low by about 6% which may provide some short-term support. A drop below this price is still possible, but growth in China and the U.S. over the rest of the year should help drive shares higher by year-end.

Disclosure: Long PBR

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