A Contrarian Opportunity Is Available for This ‘Problem Child’ Oil Play
With very little going right in 2022, investors hit with myriad economic challenges saw significant opportunities in the hydrocarbon energy sector. Obviously, due to Russia’s destabilizing invasion of Ukraine and the subsequent retaliatory measures across the geopolitical spectrum, oil and natural gas prices skyrocketed. However, some companies like Brazil’s Petrobras (PBR) didn’t quite enjoy the same outstanding returns as its peers, with PBR stock up “only” 10% on a year-to-date basis.
To be sure, the benchmark equity indices all flashing red in the aforementioned period presents PBR in an incredibly positive light. However, when stacked against other hydrocarbon players, Petrobras doesn’t seem so impressive. For example, Exxon Mobil (XOM) is up nearly 40% YTD while Chevron (CVX) gained over 22%. Still, the main issue with PBR stock is that the underlying business suffered from multiple controversies.
Earlier this year in May, for instance, Reuters reported that Petrobras shares tanked following the ouster of its CEO for the second time in two months. As well, the company is not that far removed from the scandals and financial turmoil of the previous decade.
Still, what came out of the prior troubles was a leaner and more profitable organization, according to the Financial Times. Further, depending on the outcome of Brazil’s presidential election, PBR stock might benefit from renewed vision and vigor.
Per FT.com, leftist ex-president Luiz Inácio Lula da Silva’s “manifesto calls for Petrobras to once again be an ‘integrated energy company’, present in fertilisers, renewables and biofuels — areas at one point it largely decided to exit in order to focus on its core activity of pumping deepwater crude.”
Given the wider threats to the food supply chain, the above business components could be a gamechanger for PBR stock. Yet the underlying company became one of the focal points for unusual options activity – and not in an optimistic sense.
Traders See Downside for PBR Stock
Following the conclusion of the Sept. 28 session, PBR stock ranked as one of the most traded options contracts. Specifically, bearish traders targeted two puts. The first was the $12 puts with an expiration date of Nov. 4, 2022. Volume reached 16,007 contracts against an open interest reading of 267.
For the second entry, pessimists focused on the $12 puts with an expiration date of Oct. 28, 2022. Here, volume reached 6,261 contracts against open interest of 168.
To be fair, some traders took the contrarian road, moving into the $13.50 calls with an expiration date of Nov. 4, 2022. In this case, volume reached 2,895 contracts versus open interest of 305.
Nevertheless, pessimism dominated the unusual options activity of Sept. 28. What’s more, the bearish trades aligned with the predominant trend in the derivatives market. According to data from Barchart.com, the put/call open interest ratio stood at 1.51. Typically, the delineation point between bullish and bearish sentiment is 0.70, with figures above this threshold representing bearish sentiment.
In addition, analysts have started to take a dimmer view on PBR stock. Three months ago, among four experts, the assessment was split, with two rating Petrobras a “strong buy” while the other two rated it a “hold.” In the current month, among three covering analysts, only one rated it a “strong buy.” The others rated PBR a “hold.”
A Daring Bet to the Upside
To be clear, anyone thinking about going the contrarian route – that is being bullish on PBR stock – absorbs a significant risk. At time of writing, the beta for PBR is 1.37, reflecting higher-than-average volatility. Still, broader fundamentals suggest that Petrobras stands a solid chance of rising higher.
For one thing, Russia’s partial mobilization initiative strongly suggests that the crisis in Ukraine will last longer than many experts previously anticipated. Therefore, the hydrocarbon energy sector may suffer from inflationary forces, irrespective of what global central banks do. And that’s because if demand for hydrocarbons continues to remain strong, the lack of supply will likely represent an overriding factor.
Interestingly, it appears that World Bank President David Malpass is of the same mindset. According to a Reuters’ description, Malpass “warned that it could take years for global energy production to diversify away from Russia after its invasion of Ukraine, prolonging the risk of stagflation, or a period of low growth and high inflation.”
With the Federal Reserve committed to attacking inflation through raising the benchmark interest rate, economic slowdown could certainly be on the cards. But what Malpass may be implying is that energy prices could still be elevated.
If so, this dynamic would benefit few investments. And PBR stock just might be one of those rare exceptions.
Not for the Faint of Heart
Again, it’s worth reminding investors that PBR stock features a high beta. As well, the underlying Brazilian market isn’t the most stable in the world. Therefore, anything is possible. At the same time, subtle and not-so-subtle clues suggest that Petrobras could be a contrarian bullish candidate.
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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.
