Petroleo Brasileiro S.A. - Petrobras (PBR)

[eastunder]

Petrobras Risks Post Brazil Election: Remember The Chanos Short

http://blogs.barrons.com/emergingmarketsdaily/2014/10/24/petrobras-risks-post-brazil-election-remember-the-chanos-short/?mod=yahoobarrons&ru=yahoo

By Dimitra DeFotis
October 24, 2014, 10:51 A.M. ET



(l. to r.) Reuters, Associated PressBrazil presidential candidate Aecio Neves, left, and President Dilma Rousseff.

No matter who wins Brazil’s presidential election on Sunday, Monday will bring clarity for Petrobras.

Shares of state-controlled energy giant Petrobras, or Petroleo Brasileiro (PBR), have jumped 8% today after polls showed Pres. Dilma Rousseff inched ahead versus the more conservative investor-favorite Aecio Neves. It’s somewhat incongruous, but the race will be very close, and Petrobras stock tumbled 18% this week through Thursday to $12.11. The iShares MSCI Brazil Capped ETF (EWZ) is up nearly 5% today, but dropped nearly 11% this week and is down about 6.5% year to date.

Investors would be wise to rewind the sober observations of short-seller Jim Chanos, who thinks Petrobras’ finances are weak and sees downside risk if Pres. Dilma Rousseff wins, AND downside risk if more conservative investor favorite Aecio Neves wins.

The reason? Chanos frowns on Petrobras’ borrowing structure: Petrobras needs to borrow billions just to cover its capital spending since cash flow is inadequate. And deep-water drilling projects are no guarantee of future production, nor future profits. Even if the deep-water bonanza comes to fruition, oil prices are a question mark. Certainly Brazil hopes to sell at a price well above $80 per barrel, given the high costs of its exploration projects.