Petrobras investors: brace yourselves for more pain

Shares in Brazilian state-owned energy behemoth Petroleo Brasileiro (PBR, quote) fell another 3.3% on Tuesday, adding to the already 40.5% loss in the ADR shares over the last year.

Petrobras building in Brazil

The company has had year-on-year sequentially lower earnings for the last two quarters with trailing earnings falling by 26.0% from the previous four quarters. Petrobras stock is now cheaper than any time since 2005.

Weak fundamentals and petroleum prices are not the only headwinds facing the company though. The shares listed on the NYSE are down over 35% since February 1st while the company’s domestically listed common shares have fallen by only 25.3% over the same period. The difference in returns is a rapidly depreciating currency due to aggressive government intervention.

This week the Brazilian real traded its lowest since 2009 after having slid 6.5% over the course of this year, the largest decrease of 16 currencies tracked by Bloomberg.

While the government’s battle lines against the ‘currency wars’ were largely ineffectual last year, a series of rate cuts, increased taxes on foreign loans and dollar buying on the spot market have pushed the real continuously lower over the past two and a half months.

Besides the relative losses from a depreciating real for ADR investors, the company may be setting up for a disappointing second quarter report later in the year.

The company’s CFO, Almir Barbassa, said Tuesday that the company could face negative effects from currency movements due to its $76 billion in dollar-denominated debt. Quick moves in currencies often have a larger effect on companies due to reactionary policies and hedging by the company.

While the company did not disclose any currency hedging in which it participated earlier in the year when the real was strengthening, significant losses could be reported on the second quarter release.

Investors may see a slight reprieve from a bounce off lows in both the real and oil prices over the next few weeks, especially if global markets calm from recent unease. Shareholders should reevaluate estimates and positions later in the quarter as headline risk from currency movements and hedging come to light.

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