Analysis: Amidst the tense Brazilian elections, Petrobras emerges as a surprising darling in the market

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RIO DE JANEIRO (Reuters) – State-run Brazilian oil company Petrobras (PETR4.SA) spent much of 2022 in turmoil, shuffling four chief executives while President Jair Bolsonaro lashed out at the company to cut fuel prices.

Faced with that and the potential return of a left-wing government in next month’s elections, some investors have moved to the sidelines. But of the seven local fund managers who spoke to Reuters in recent weeks, five said they are standing by or even increasing their positions as a tense election approaches.

Their cautious optimism highlights the number of investors who are coming to terms with the lead candidate, former President Luiz Inacio Lula da Silva, even when it comes to state companies whose profits have struggled at times under the Labor Party (PT).

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Part of the revolutionary cause is a bet that he is unlikely to repeat the political excesses of his 2003-2010 term and his carefully chosen successor’s 2011-2016 presidency, when the state oil company became an acronym for mismanagement and corruption.

But it also reflects frustration among some investors with Bolsonaro’s right-wing government, which took office in 2019 promising orthodox policies and possible privatization – only to take a strong, pragmatic approach to managing the company and fuel pricing. Read more

These policies have affected the company’s valuation since he took office, and as a result, some investors don’t see much difference with Lula’s more open, interventionist approach.

“There has been no serious discussion about the privatization of Petrobras. Lula will put pressure on fuel prices, but Bolsonaro has done the same,” said James Gulbrandsen, chief investment officer for Latin America at NCH Capital in Rio de Janeiro.

“What’s the difference? I don’t see the big difference.”

Despite this year’s chaotic news flow, Petrobras has so far proven bulls in the local market. Its Sao Paulo stock of choice is up about 63% year-to-date, outpacing all major international oil companies and far outperforming the Brazilian stock index Bovespa, (.BVSP) which is up about 7%. Read more

However, many investors believe the stock still has room to run.

“Petrobras shares are really cheap,” said a Sao Paulo fund manager who manages about 20 billion reais ($3.9 billion). Like many interviewed for this article, he requested anonymity to speak candidly about the state company amid a heated election.

“It is reasonable to expect some changes (if Lula wins). But a regression in the policies of the (recent) Labor government is not expected. Even so, this regression is more than an estimate.”

Bears hanging back

While many investors remain relatively optimistic, some are playing a wait-and-see role.

Under the governments of Lula’s party and his successor, Dilma Rousseff, Petrobras heavily supported the Brazilians at the pump, incurring billions of dollars in losses due to policies that Lula hinted he might appeal.

Although Bolsonaro has repeatedly fired chief executives when fuel prices have risen, the company has at least officially operated under an apolitical pricing policy during his tenure, with Petrobras tracking global energy markets through domestic fuel prices.

One of the fund managers said: “Attractive valuation makes a position in the company worthwhile. However, this does not justify increasing our stake in the company, given the risks associated with the elections, which are very high.”

“Among the concerns is Lula’s signals regarding how to change the company’s pricing policy.”

In a note to clients in June, Bradesco BBI analysts Vincente Valanga and Gustavo Sadca emphasized that risks related to Trobras “remain skewed to the upside.”

But in a new note this week, the same analysts said they now believe Petrobras under Lula’s leadership may embark on costly acquisitions of former state firms such as electricity utility Eletrobras (ELET6.SA) and fuel distributor Vibra Energia.

“Contrary to our previous scenarios, such moves ‘would be detrimental to shareholders,'” they wrote.

(1 dollar = 5.18 riyals)

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Additional reporting by Gram Slattery in Rio de Janeiro and Paula Lair in Sao Paulo; Editing by Brad Hines and Margarita Choi

Our Standards: Thomson Reuters Trust Principles.

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Thomson Reuters

Reporter in Rio de Janeiro who specializes in the oil and gas industry, as well as white-collar crime and corruption. Recent stories have shed light on criminal wrongdoing by some of the world’s largest commodity traders and revealed how organized crime groups have infiltrated Brazil’s largest fuel distributors. Previously working in São Paulo and Santiago, he also reported extensively from Argentina and Bolivia. He was born in Massachusetts and graduated from Harvard College.

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