Brazil’s ‘Out of Control’ Pandemic Prompts Petrobras Downgrade

(Bloomberg) -- State-controlled oil producer Petroleo Brasileiro SA has drawn its sole sell-equivalent rating as Brazil struggles with soaring coronavirus cases.

Petrobras’s American depositary receipts were downgraded to underperform from market perform at Raymond James on its tie to the local economy and currency, according to analysts led by Pavel Molchanov.

“The pandemic is totally out of control,” analysts wrote in a report from May 18. “We see no way to avoid a national lockdown, and for a lengthy period.”

Brazil surpassed Italy and Spain and now has the world’s fourth-highest number of Covid-19 cases. With death toll crossing the 16,000 mark, investors still wait for the government to announce the successor of Nelson Teich, who left the post of Health Minister after just 29 days on the job.

While Petrobras trades at discounted multiples and is free cash flow positive, analysts warn of the intensification of political risk and their consequences amid the country’s ‘horrid’ virus data.

A national lockdown “would not only exacerbate pressure on Petrobras’ downstream segment, but also worsen macro conditions, with ramifications for the currency and sovereign credit rating, to which Petrobras is exposed.”

Last week, Petrobras announced a 65 billion-real impairment for the first quarter after trimming its outlook for oil prices. Despite a profit miss, the company’s Ebitda was ahead of expectations and operating data were seen as solid by analysts.

©2020 Bloomberg L.P.

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