Goldman Sachs Group Inc (NYSE:GS) has downgraded Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR.A) from “buy” rating to “neutral” rating. The twelve-month price target of Petrobras ADRs has been lowered to $13.60 from previously set target of $19.20. The move came after the Brazilian government said that it would hold subsidized fuel rate.
Felipe Mattar, an analyst at Goldman Sachs Group Inc (NYSE:GS) said that the Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR.A) shares price depends highly on national fuel pricing policy., They are also affected by the currency fluctuations. Workers Party, the present government of Brazil, will hold subsidies on fuel prices meant for domestic customers. The step is taken as the economic growth is still hovering below 1%. The government wants to control inflation. Therefore, Petrobras will not be permitted to hike fuel prices in this year.
Goldman Sachs Group Inc (NYSE:GS) is cautious about borrowing status of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR.A). The consistent borrowing will make it tough for Petrobras to pay dividends. It will face the credit crunch to invest in offshore exploration activities. As per research firm, Petrobras can consider the option of secondary offering next year. It will help Petrobras to face the problem of currency depreciation. Also, it will get the proceeds to handle debt problems. It has to search alternatives to raise funds so as to handle rising dent problem. The stocks of Petrobras can witness high volatility as cash flow will vary as per changing conditions.
The fuel prices
As per Brazilian government, the steep drop in international oil prices has brought benchmarks at par at domestic subsidized fuel prices. Being a state-controlled oil company, Petrobras have to follow the government decision. The downgrade of Petrobras stock comes at a crucial time when already government is dealing with economic challenges. The cash flow and debt problems will force Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR.A) to offer more shares to generate funds to finance its operations.