Image Source: Petroleo Brasiliero corporate website
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What: Shares of Brazilian oil giant Perobras jumped 63% last month. While there was plenty of news fodder around the soap opera that is the Brazilian government corruption probe, the company's stock rose the most on news that it was planning to sell part of its business in Argentina and announcements of layoffs and cost savings plans.
So What: As a company that straddles the fence between a publicly traded company and a state run enterprise, Petrobras' fate is going to be tied immensely to what happens in the next few months as Brazilian prosecutors dig deeper into the corruption probe that is boiling all the way to the current president, Dilma Rouseff, and her predecessor, Luiz Incio Lula da Silva. The whole probe started when investigators found that Petrobras executives were taking kickbacks for construction contracts at a time when Rouseff was chair of the board at Petrobras. For anyone that has a stake in Petrobras, there is some hope that it will be able to become less beholden to the government and operate more as a public company.
A few signs that this is happening took place in March, which helped to give investors some confidence. The first was that the company was in talks to sell its Argentinian assets for about $1.2 billion toArgentina basedPampa Energia SA. The sale could help Petrobras fill its funding gap for the year and ease its massive debt profile.
Another promising sign was that the company announced plans to cut costs and save some money. On March 17, the company announced that it was laying off 12,000 employees, about 15% of its workforce. Also, the company is looking to implement a reorganization plan that will save it $500 million annually.
Now What: These are the moves that Petrobras will need to make if it has any chance of getting out from under its $130 billion debt load, but they are only the first steps. The workforce cuts and savings plans will help on the operational side of things, but the company will need to reign in capital spending as well. These are the things that it can control, and an increase in oil prices could go a long way towards helping boost its prospects over the next few years.
As an investor, though, it's probably best to keep away for a while longer. While the cost savings plans sound ambitious so far, there is still a lot of things that need to fall in Petrobras' favor before it becomes a stable, profitable business worthy of investment.
The article Shares of Petrobras Surged a Whopping 63% in March, Here's Why originally appeared on Fool.com.
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