Petrobras Surges on Bolsonaro's First-Round Victory in Brazil

(Bloomberg) -- It’s time to buy state-controlled oil giant Petroleo Brasileiro SA.

Analysts from JPMorgan to Bank of America Merrill Lynch boosted their ratings on the stock today after former army captain Jair Bolsonaro beat expectations in the first round of Brazil’s presidential election and seems headed for a win later this month.

Risks from political interference to the future of the company’s fuel price policy appear to have subsided as a result, the analysts said. Bolsonaro’s economic advisor Paulo Guedes has proposed privatizing government-owned companies and overhauling Brazil’s social security system. Investors also expect less government interference in state companies under Bolsonaro.

Petrobras rallied as much as 13% before trimming gains, while state-controlled utility Centrais Eletricas Brasileiras SA jumped as much as 15 percent. Before the local market opened, JPMorgan Chase & Co. upgraded Petrobras to buy from neutral.

"The results in the first round showed Mr. Bolsonaro with a substantial lead vs. Mr. Haddad, indicating less political risk for Petrobras’ investment thesis," analyst Rodolfo Angele said in a note. The stock’s cheap valuation also increases potential upside, he said. JPMorgan said Petrobras is trading at 3.4 times estimated 2019 earnings before interest and other items.

A better post-election scenario also led Bank of America Merrill Lynch to raise Petrobras to buy from neutral.

"Although there is still significant energy policy uncertainty and limited clarity as to how the new government will deal with Petrobras, we believe the market had been expecting a less favorable outcome," analysts Frank McGann and Joao Victor Lorenzi wrote in an Oct. 8 report.

Bradesco BBI analysts Vicente Falanga and Osmar Camilo cited increased odds for at least some fiscal adjustment, which would benefit the oil company.

"Although we foresee challenges such as the removal of diesel subsidies, currency could help and Petrobras could resume a much more constructive news flow agenda," they wrote in a report.

Bradesco BBI raised the stock to outperform from neutral.

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