Stressed Out: Why Ex-President Lula da Silva's Questioning Lifted Petrobras

 | Mar 04, 2016 | 12:45 PM EST
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

pbr

This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

This could be a turning point for Petrobras (PBR) and for Brazil. The stock's NYSE-listed ADR was up 9% on Friday morning and the stock itself jumped 14% on the Brazilian stock exchange following news that former President Luiz Lula da Silva was detained for questioning in the corruption scandal that has engulfed the country.

The jump in the company's stock is a welcome respite for investors in Petrobras, which is part of our "Stressed Out" group of companies to watch because they may be facing challenges in paying back their huge debt.

The former president, a socialist, was a hugely popular figure in Brazil. Elected to power in 2002, he left office in 2010. In that period, he raised his country's profile internationally and presided over a period of very strong economic growth, which coincided with the boom in commodities prices.

Brazil was almost untouched by the financial crisis and Lula's social programs have helped millions get out of abject poverty.

However, his critics have accused his Workers Party (PT), which is also the party of his successor, current Brazilian president Dilma Rousseff, of getting favors from various companies in exchange for contracts with state-owned Petrobras, and have said that Lula personally knew about these, accusations that he has always denied.  

Brazilian police said in a statement quoted by Reuters on Friday: "Ex-president Lula, besides being party leader, was the one ultimately responsible for the decision on who would be the directors at Petrobras and was one of the main beneficiaries of these crimes. There is evidence that the crimes enriched him and financed electoral campaigns and the treasury of his political group."

Lula's spokesperson did not immediately respond to requests for comment from media, but his foundation, whose headquarters were also raided, said in a statement quoted by Reuters that his detention was "an aggression against the rule of law and Brazilian society." The foundation, which has also consistently denied any wrongdoing by Lula, called his arrest "arbitrary, illegal and unjustifiable."

The fact that the investigation did not sink the stock, just the opposite, shows that investors believe this episode to be positive for the company. The inquiry has dragged on for two years, getting closer and closer to the highest ranks of Brazilian politics. Its timing has coincided with the collapse of the oil price, sending the stock down by more than 60% in the period.

The fact that Lula is questioned could be seen as marking the end of the investigation and some conclusion to it. Nothing is worse for investors than uncertainty, and at least if the probe is finished investors can be sure that no more bad news can jump out of there.

The company itself is taking measures to shore up its finances, which is another bit of good news. As The Deal -- a sister publication to Real Money that focuses on mergers and acquisitions -- writes, the Brazilian company is in talks to sell its Argentine unit to Pampa Energia, a company based in Buenos Aires. The stake is valued at around $870 million.

The Deal: Petrobras Disposals Edge Nearer Amid Predictions of Capital Increase

This latest stage of the Petrobras investigation is the 24th, and has been dubbed by police "Aletheia" -- a Greek word that can be translated as "disclosure," or "truth." Judging by Petrobras stock's reaction, the best translation at this moment would be "the real deal." Investors must hope it is also the final deal.

For more on Real Money's 20 distressed companies to watch:

Columnist Conversations

View Chart »  View in New Window » XLY has met multiple upside targets, you may want to trail ...
WYN is ripping following this morning's earnings report. The lodging company is up over 8% and is in the numbe...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.