Petrobras Responds To Brazilian Trucking Strike — And Receives 3 Big Downgrades

Petroleo Brasileiro PBR, also known as Petrobras, was downgraded by Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley Thursday after announcing that it will temporarily cut diesel prices in Brazil.

Shares of the oil giant dropped 13.2 percent during pre-market trading to open at $13.11. The stock had previously been up 47 percent this year.

Truckers On Strike

Petrobras announced Wednesday that it will lower diesel prices in Brazil by 10 percent for the next 15 days. The company then plans to gradually raise prices back to market levels.

The price cut is in response to local political tensions. Over 200,000 truckers have gone on strike over rising fuel costs. Protesters have used their trucks to block major roads and impede access to major ports. The strike threatens to create food shortages and wreak havoc on the country’s exports.

CEO Pedro Parente said during a press conference that the decision to cut diesel prices had not been demanded by the government and is aimed at helping to resolve tensions.

The Street Weighs In

The consensus on Wall Street is that the move will have only a negligible impact on Petrobras’ revenues. Yet the clear and present danger for investors is the loss of the Petrobras’ pricing independence, despite Parente’s insistence that it “has not been damaged.”

Credit Suisse analyst Regis Cardoso disagrees with Parente. The recent events have brought [Petrobras’] technical pricing policy to the political debate and we fear that it increases risks of interference,” Cardoso said in a note.

Even if the company’s independence remains intact, shares are still likely to be impacted by traders’ perceptions of the company. The decision “is likely to materially damage Petrobras’ perceived independence,” Bank of America’s Frank McGann said in a note.

Bruno Montanari from Morgan Stanley holds the same view, saying that “the perception of renewed external intervention in pricing policy … is enough for [the market’s] confidence to wane.”

Analysts have mixed opinions on the prudence of the move. Credit Suisse's Cardoso called it “sensible,” arguing that it will help to prevent exacerbated supply disruptions.

BofA's McGann said it could also set the precedent for future ad hoc decisions, which would be “very negative” for Petrobras based on its history.

This uncertainty is expected to linger until Brazil’s election process is completed in the fourth quarter.

The Ratings

Bank of America downgraded Petrobras from Buy to Neutral and cut its price target from $20 to $17, reversing an upgrade issued just two weeks ago. 

Credit Suisse downgraded Petrobras from Outperform to Neutral and maintained its $15 price target.

Morgan Stanley downgrade Petrobras from Overweight to Equal-Weight and cut its price target from $15 to $13.

Related Links:

How Losing Control Of The World's Biggest Gold Mine Could Pay Off For Freeport

Morgan Stanley Upgrades Refining Sector, Names Valero A Top Pick

Photo by Patrick-br/Wikimedia.