Petrobras (PBR) to Pay $2.95B for Settling Investor Lawsuit

Petroleo Brasileiro S.A., aka Petrobras PBR, which has been reeling under severe graft and corruption charges, recently agreed to pay $2.95 billion to settle class-action lawsuits filed by investors. The payout marks the biggest such payment in the United States by a foreign entity and one of the largest securities class action settlements in the U.S. history. The settlement seeks to put to rest one of Brazil’s most notorious cases of fraud.

The Brazilian oil giant was at the heart of the massive corruption scandal dubbed as — Operation Carwash — which incriminated other industries like banks, construction firms and shipyards along with high-level politicians. Various lawsuits were filed against Petrobras by shareholders to recoup losses triggered by money laundering and bribery schemes. Many senior executives of the company were accused of taking bribes for inflated contract schemes. Former Brazilian President Luiz Inacio Lula da Silva was also charged with corruption and sentenced to an imprisonment term of nearly 10 years.  Charges were also pressed against the current President Michael Temer in May 2017, shaking the nation, following which Brazilian Real fell hard against the dollar — its worst since the global financial crisis in 2008.

Petrobras’ involvement in the multibillion dollar corruption case was a major overhang for the company which scarred its credit metrics and turned it into the world's most indebted oil company. The settlement deal comes days after Brazil’s securities regulator indicted eight more executives of Petrobras including the former CEOs, Maria das Gracas Foster and Jose Sergio Gabrielli.

The settlement will be reflected in the company’s fourth-quarter 2017 results and will be paid out in three installments. However, the deal does not include the admission of wrongdoing by the company, which considers itself a victim of the Carwash Operation scandal.

The settlement — subject to approval by a U.S. judge — is intended to resolve all pending and prospective class action claims in the United States. However, it does not include compensation for investors who bought their securities in Brazil, where class actions are rare. The company has settled 21 individual actions out of the total 27 brought against it in the U.S. District Court for the Southern District of New York and expects the remaining to join the current settlement.

The settlement, which came at a lower cost and sooner than expected, is an important achievement for the company as it tries to emerge from the bribery case which had involved various corporate executives and political figures. The agreement also seeks to remove uncertainty regarding Petrobras’ liabilities, enabling it to better plan how it uses the future cash flow.

As it is, Petrobras is concentrating on improving its liquidity and operational performance of late. The company’s effort to deleverage or at least refinance its debt obligations to extend maturity is working in its favor. Its divestment strategies of non-core assets and focus on Brazil’s pre-salt reservoirs will help in reinstating its financial health. The company is entering into various strategic partnerships with foreign oil giants to drive exploration momentum. In this regard, Petrobras has inked deals with major players like TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and Statoil ASA.

Petrobras currently carries a Zacks Rank #2 (Buy).

Petroleo Brasileiro S.A.- Petrobras Price

Petroleo Brasileiro S.A.- Petrobras Price | Petroleo Brasileiro S.A.- Petrobras Quote

Another player in the energy space worth considering is Northern Oil and Gas, Inc. NOG, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Northern Oil and Gas pulled off an average positive earnings surprise of 175% in the trailing four quarters.

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