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Shares of Brazilian oil giant Petrobras (NYSE: PBR)fell nearly 20% Thursday morning after a bombshell report emerged last night from South America's leading economy. The newspaperO Globoreported that President Michel Temer of Brazil is on tape endorsing the continuance of bribe payments to keep a former high-ranking politician, Eduardo Cunha, from further cooperating with authorities in an ongoing corruption case. Cunha is currently in jail due to his involvement in the corruption scandal that rocked the nation in recent years.
The long-standing investigation focused on bribes, collusion, and other forms of corruption between dozens of government officials and several of Brazil's leading state-owned companies in previous years. Petrobras was at the center of it all -- and now it appears politicians have yet to learn their lesson. As of 12:03 p.m. EDT, the stock was sitting on a 19.7% loss.
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The news as currently reported doesn't explicitly mention Petrobras, but recent history doesn't exactly buy the company the benefit of the doubt. It's important to note that the reported recording more strongly hints that previous corruption activities may still be left undiscovered, not that company officials are involved in criminal activity since getting humiliated on the world stage in recent years. At this point, it's too early to tell what role, if any, the state-owned oil giant plays in the latest allegations.
Perhaps more than direct involvement, today's drop signals that the cloud of political and economic uncertainty hanging over Brazil has not entirely passed. The world runs on stability -- and that has been sorely lacking in Brazil in recent years. The nation is embroiled in the worst recession in its history, with the economy contracting 3.6% last year. Temer -- who replaced the impeached president, Dilma Rousseff -- has just a 4% approval rating. Ninety-two percent of Brazilians think the country is headed in the wrong direction. Depending on how the tapes play out, the country may be forced to impeach its second straight president.
From an investing standpoint, this is unfortunate news for Brazilian stocks, and especially Petrobras, which roared back from all-time lows with a 137% gainin 2016. Management has outlined ambitious plans to clean up the balance sheet and refocus the business on core opportunities. All signs indicate that the business, which boasts the industry's best operating cash flow, is on the right track. But it has a long way to go to chip away at the $105 billion in debt still outstanding. The re-emergence of political turmoil at the highest level won't help.
Today's news will take time to play out. In the best-case scenario, the company will be completely removed from recent bribe payments. In a worst-case scenario, assuming new allegations from the previous corruption scandal are uncovered, there could be more fines on the way.Investors that have sniffed around Petrobras and other Brazilian stocks in the last two years may have uncovered opportunities that appeared too good to be true, but today's news is a reminder of the not-so-subtle value of political stability.
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