Brazil Hedge Fund Says Petrobras Shares Can Soar 50% in Best-Case Scenario

(Bloomberg) — Shares of Brazilian state-owned oil company Petroleo Brasileiro SA are cheap and have room to rise no matter who wins Sunday’s presidential runoff vote, according to local hedge fund Legacy Capital.

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Gustavo Pessoa, partner and manager at the Sao-Paulo based 32 billion reais ($5.9 billion) asset manager, said Petrobras’ shares have room to jump as much as 50% under a market-oriented administration that keeps in place the international price parity policy.

Pessoa argues the recent drop in fuel prices — backed by tax cuts that are expected to remain in place — eases social pressure for the company to change its price policy in the short term. That’s true for whoever wins the presidency, even as he expects Luiz Inacio Lula da Silva to interfere more in the firm than President Jair Bolsonaro.

“If fuel prices are low, it takes pressure off the company,” said Pessoa. “A change in pricing policy may not be as quick.”

Petrobras has a policy of tracking international fuel prices that is protected by bylaws and require the government to compensate the oil producer if it is forced to sell fuel below market value. As crude prices surged earlier this year, the company was forced to raise the cost of domestic fuel, irking Bolsonaro and his allies. The oil producer later reduced prices, while the government slashed fuel taxes to ease pressure on inflation.

Pessoa says a change in the firm’s international price parity policy is the biggest risk for the company. Petrobras shares tumbled each time Bolsonaro changed the company’s CEO for clashes on fuel prices.

Legacy added small long positions on Petrobras and Banco do Brasil SA’s shares judging valuations were cheap. Petrobras’ preferred stock is up more than 10% since then and still many valuation measures are well below that of comparable peers or historical levels. The stock traded at around 32.8 reais as of 10:30 a.m. in New York.

While adding exposure to the oil producer, Pessoa said Legacy reduced overall risk in Brazil after the first-round vote as the presidential race remains tight. After securing a stronger-than-expected support in the first round, Bolsonaro has narrowed the gap to front-runner Lula. The runoff is on Sunday, Oct. 30.

“Our view is that the dispute is now tied”, he said. “And we need to have more conviction of a favorite to jump in one direction.”

–With assistance from Vinícius Andrade.

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