If the Petrobras story sweeping Brazil today was a sporting event, it would be the infamous Brazil vs Germany game from the 2014 FIFA World Cup. And Brazilians would be forced to watch it over and over and over again.
Petrobras, once the pride of Brazil, is now an embarrassment. Investors want to ask company executives: how can you be so stupid?
In 2005, Petrobras was heralded as the high tech deep sea discoverer of a oil far below the ocean bedrock off the coasts of Rio and São Paulo states. The market believed Petrobras found a mini-Venezuela, an oil Atlantis. They loved Petrobras. Money piled into Brazil because of these discoveries. If there was any truth to the saying here that “God is a Brazilian”, Petrobras´ newfound oil wealth was the proof.
Ten years later and investor respect in the company has gone to zero. Instead, they have become like Nietzsche and this Brazilian God is dead. Can it ressurrect?
The big question now is not whether Petrobras will survive a series of lawsuits and investigations. It´s whether or not investors will trust these guys again? That includes corporate partners drilling in the Santos and Campos oil fields in the Atlantic Ocean, too. Lawyers are asking this question. It´s a problem for Petrobras. Its shares trade at just 5.5 times earnings. Only Gazprom is cheaper. But the Russian gas company is being sanctioned by the world´s most powerful economies. Petrobras, meanwhile, has its government owners to blame for its problems. Petrobras is now in the crosshairs of lawyers from Brazil to the United States, and American lawyers don´t horse around. They go for the jugular. Like sharks, they are smelling blood in the water.
Providence, Rhode Island opened its own class action lawsuit against the ailing oil company on Wednesday, Christmas Eve day. The lawsuit was filed on behalf of shareholders who bought Petrobras ADRs between January 22, 2010 and November 21, 2014. The suit also includes bond holders who own debt from Petrobras International Finance Company, or PifCo, and Petrobras Global Finance from February 3, 2012.
Petrobras´fall from grace has been monumental. In June of 2008, Goldman Sachs predicted that Petrobras shares would hit $60. Today, they trade around $7. Despite interest from bottom feeders who see this as a buying opportunity, bears expect things to get worse for Petrobras before they get better. The lawsuits are destroying investor sentiment.
The Providence lawfirm of Labaton Sucharow also cited a number of politicians in the lawsuit, including Petrobras CEO Maria Gracas Foster and Brazilian president Dilma Rousseff as “persons of interest” in what has become the biggest corporate fraud in the country´s history. This is the third law firm to gun for Petrobras in less than a month, citing its breach of the Securities Act´s anti-fraud clause.
Petrobras is a public company. In theory, it exists for the public good. But that public turned out to be a handful of rich executives working in the energy and construction businesses here. Petrobras massively overspent on refineries at home and abroad in Texas. With the extra cash, it lined the pockets of political appointees and close friends in various businesses, in a combination of political and personal greed. Perhaps the only good to come out this scandal is the fact that arrests were made. At least a dozen executives spent Christmas behind bars, or locked in their homes waiting for a court date.
Once a mighty oil company, the pride of Brazil has become a disgrace. Petrobras is on its way to become the biggest foreign class action suit in American history as U.S. investors sue the company for fraud.
According to Estado de São Paulo newspaper, RI attorney Michael Stocker said the firm included big ticket names like Dilma in their suit against Petrobras in order to force a settlement with the city. The city is not bringing a lawsuit against individuals perceived to be involved in the corruption scandals, however. American investors are holding around $100 billion in the company´s shares, which might make it the largest foreign investor scandal ever in the U.S., and puts it on par with Enron and Worldcom when it comes to class action cases for fraud.
Also on Dec. 23, Moody´s warned yet again that Petrobras´ investment grade status was at risk. The company´s foreign debt is currently rated Baa2, two notches above speculative grade. Petrobras´ credit outlook remains negative. A long term rating downgrade would put Petrobras debt at Baa3 at Moody´s. Lower than that is considered a high yield, or “junk bonds”. The credit cut would ultimately make it more costly for Petrobras to tap bond markets for capital because investors in Petrobras debt would demand higher interest payments.
Moody´s didn´t blame the lawsuits for its warning. It said the ”rating action reflects concern about potential liquidity pressures that could arise if the company does not meet requirements under its bond indenture for the delivery of financial statements.” Petrobras has postponed its third quarter earnings results because auditors don´t trust the numbers and do not want to sign off on them for risk of being part of future lawsuits. The Rhode Island lawsuit is the closest to bringing bond holders on board in the U.S.
At least 16 executives are currently serving time for the scandal, known locally by the Federal Police operation “Lavo Jato”, or jet wash. Some of the biggest names in Brazilian business were involved in the money laundering schemes that has turned Petrobras on its head. If there is one company that wore the Brazilian flag with pride, it was this one. Petrobras is also one of the biggest contributors to cultural events in the nation, including funding to Brazil´s fledgling film industry.
Some of the more notable villains in the case include Dalton dos Santos Avancini, president of construction company Camargo Corrêa, Ildefonso Colares Filho, president of construction firm Queiroz Galvão and José Adelmário Pinheiro Filho, president of another construction major, OAS. They were arrested in November. The Federal Police believe others involved in the scandal have fled the country and have asked Interpol for help in their capture.
While the police drama plays out in Brazil, shareholders are watching this fiasco erode their wealth. Those who bought when Petrobras fell below $10, which is right around the time Barclays Capital initiated a buy on the stock, lost another 25% since.
Over the last three months, Petrobras shares have lost 55% of their value. That´s worse than both Gazprom and Rosneft, two Russian energy giants being sanctioned by the U.S. and European Union. Year-to-date, Petrobras shares are down more than 42%, worse than Gazprom, but slightly better than Rosneft.
Petrobras won´t go broke. It´s too powerful and remains tied to a relatively strong government that can save it. But it will take a long time for Petrobras to regain trust, both from corporate partners and portfolio investors who believed Petrobras´ oil discoveries were a good bet on Brazil´s future. Brazilians have always said that they were the country of the future. The Petrobras oil boom was like a dream come true, as if DisneyWorld had relocated to Rio. But this scandal´s size and scope — stretching all the way to Europe in some cases — has shown that Petrobras didn´t propel Brazil into a wealthier future, afterall. Instead, it simply took Brazil back to its comfort zone, where corrupt governments and private families collude to strip the nation of its resources.
For Petrobras shareholders, hopefully this is the last chapter in that long and tired history in Brazilian politics.