Petrobas Shares Tumble Following Credit Suisse and Citigroup Downgrades

Credit Suisse and Citigroup downgraded

this week. On Sunday, Credit Suisse analyst Vinicius Canheu downgraded Petrobras from Outperform to Underperform and lowered the price target from $25 to $14. Canheu noted that 2014 is a "delicate year" for Petrobras due to uncertainty over price increases next year and inflation and depreciation of the BRL with the election year. The analyst commented, "The lack of transparency should leave a lot of skepticism in the market, in our view. If prices have not increased enough in the past two years due to concerns about inflation, domestic price volatility and indexation, how can one be confident that further increases will happen in 2014, an election year where inflation is still in focus and the FX expected to depreciate further? It will be management's onus to prove the skeptics wrong during 2014." This morning, Citigroup downgraded Petrobras from Buy to Neutral. Citigroup analyst Pedro Medeiros reported the company's low cash flow visibility in 2014 and their tight balance sheet. Citigroup additionally updated their model to a 4% average fuel price hike next year. Medeiros wrote, "While we expect PBR to continue gradually adjusting fuel prices toward international parity, the lack of details in the fuel price policy announcement and a smaller Q4 price increase lower chances of relevant price hikes in 2014. With debt continually increasing we expect investors to raise the cost of equity for an investment in PBR‘s stock. Still, Petrobras' stock performance will likely hinge on conflicting factors in 2014; on one side high production growth should drive earnings, but on other side there should be difficult budget decisions and Brazilian politics." Petrobras shares have fallen 10.29% to 14.30 this morning.