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Petrobras remains bearish on high levels of debt

PetrobrasOn March 22nd, 2016, the shares of Petrobras (PBR) touched a high of $5.77 in the NYSE. The share price was more than twice the $2.71 per share traded in January 20th, 2016.

The recovery in the price of crude oil by more than 40% in the past two months supported the rise in the share price of Petrobras. The share price has a correlation of 0.46 with WTI (West Texas Intermediate) crude oil. Thus, it can be understood that there are several other factors, which affect the share price of Petrobras.

The business is run under five segments namely refining, biofuel, exploration and production, gas and power, and fuel distribution.

Fundamentally, natural gas and liquid products, respectively constitute 20% and 80% of the total production of Petrobras.

The company announced that its proven reserves have decreased to 10.5 billion barrels of oil equivalent, from 13 billion barrels stated earlier on. This led to a downgrade by the Standard and Poor credit rating agency.

Bloomberg Business: 7 Oct 2015

The net loss for the fourth-quarter of fiscal 2015 widened to $9.7 billion, from $9.4 billion in the prior year similar quarter. The only segment which recorded a profit in the fourth-quarter was the refining, transportation and marketing segment.

Burdened with high leverage and impairments, mainly because of low crude oil price, Petrobras trimmed its capital expenditure guidance to $20 billion for the fiscal 2016. The prior estimate of capital expenditure stood at $27 billion. In the fiscal 2015, the company’s capex was $23 billion. The company’s plan to reduce operating costs from $29 billion in 2015 to $21 billion in 2016 is also under revision. To fund operations and reduce debt, the company is currently looking into the prospects of selling onshore fields in Brazil and a portion of its share in Petrobras Argentina.

The total debt of Petrobras has increased to $126 billion in 2015, from $114 billion in 2013. The company’s debt is pre-dominantly dollar based. Thus, a strong US dollar and low crude price squeezed the company’s resources in the fiscal 2015. At the end of fiscal 2015, the cash reserves stand at $26 billion. In the fiscal 2015, the cash flow from operations declined to $26 billion from $27 billion in the previous fiscal year. Due to the net loss in fiscal 2015, Petrobras refrained from paying dividends to its share holders.

For the fiscal 2015, the ratio of net debt to adjusted EBITDA (earnings before interest, tax, depreciation and amortization) was 4.4. The value is higher than that of its peers, who command an average net debt to adjusted EBITDA ratio of mere 1.2. The share price target of analysts for a period of one year ranges from a high of $5.6 to a low of $3.6. Thus, fundamentally, the stock price has little chance to appreciate in the near future.

Technically, the chart of Petrobras indicates stiff resistance at 5.82. The stochastic indicator (a reading above 90) reflects an overbought state of the stock. Thus, it is imperative that the share price will undergo a correction in the weeks ahead.

Petrobras Stock Price: March 29th 2016

The major support for the stock exists at $3.74. Thus, a binary options trader should purchase a one touch put option contract with a target level of about $4.50. The contract expiry period should be preferably in the last week of April.

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