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Why UBS Is Further Lowering Petrobras Expectations

Petróleo Brasileiro S.A. (NYSE: PBR), or Petrobras, may have some ongoing woes in Brazil and with low oil prices. Though UBS has decided to maintain its Neutral rating for Petrobras, the Swiss banking and investment firm has lowered its earnings expectations for the state-run oil giant.

While many investors might have expected that if any call was going to be downward on earnings, the magnitude of the cuts stands out handily — by a whopping 80% for 2015 and almost 30% for the 2016 earnings.

UBS said that the new estimates reflect recent tax dispute settlements. The cuts were exacerbated by Brazil’s deteriorating macroeconomic conditions as well.

As Petrobras reports in Brazil, the local real currency was used. UBS put the EPS at 0.18 BRL (about 0.05 U.S.), down from 0.89 before. The firm’s cut for 2016 was down to 0.52 BRL in EPS for 2016, down from a prior target of 0.73 BRL per share.

Petrobras has of course slid with Brazil and with lower and lower oil prices. Still, the ongoing corruption probes and a distrust of leadership’s ability to easily get past the probes locally have weighed on investors’ psyche of late.

UBS has stuck with the BRL 15.00 local price target, versus a 4% drop to 8.82 on BRL locally in Sao Paolo trading on Tuesday morning.

In New York trading, Petrobras America depositary shares (ADSs) were down 2.5% at $5.72, so its implied price target would be roughly $9.70 in ADS terms for the NYSE-listed shares.

This call may seem obvious, but what was less obvious was why the price target was not lowered along with the earnings estimates. Petrobras ADSs have traded in a 52-week range of $4.68 to $20.94 in New York.

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While UBS did not really address this, investors simply cannot ignore the warning that remains, regardless of the issues of today. Petrobras is state-run and is not allowed to operate under the same governing principles of its rivals in most nations in the Western Hemisphere — far different from U.S. governance standards. The government controls its voting, the employees are put ahead of investors and its realized prices for the oil it can sell locally are mandated by the government. In short, Petrobras can be forced into operating at unavoidable losses, regardless of the global oil pricing.

By Jon C. Ogg