Petrobras, Odebrecht Venture Avoids Parents' Pain as Stock Soars

  • Petrochemical maker is posting best rally in emerging markets
  • Company is boosting foreign operations as Brazil demand slumps

Braskem SA, Latin America’s biggest petrochemical maker, is an unlikely contender to be the world’s top-performing emerging-market stock.

Not only is it based in Brazil, which is suffering through its longest recession since the 1930s, but its two controlling shareholders -- Petroleo Brasileiro SA and Odebrecht SA -- are mired in scandal. Odebrecht’s former chief executive officer has been stuck in jail for more than five months on allegations he took part in a pay-to-play scheme to win lucrative contracts with the state oil giant known as Petrobras. He has denied the allegations. Even Braskem has been dragged into the investigation. Its Sao Paulo office was searched in June by federal police as part of the Odebrecht probe.

None of that has stopped Braskem shares from surging 90 percent in the second half of 2015 as the company moves into the North American market, boosted in part by Brazil’s sharp currency devaluation. That’s the best performance of 837 stocks in the MSCI Emerging Markets Index and third-best in dollar terms this half, data compiled by Bloomberg show. Stocks on the MSCI index have tumbled an average of 15 percent, while Brazil’s benchmark Ibovespa index is down 32 percent in dollar terms.

"It’s a surprise considering the fragility of its primary shareholders," Michael Roche, a strategist at Seaport Global Holdings LLC, said by phone from New York. Fading concerns about the implications of the probe for the company have allowed investors to focus on its improved fundamentals as the depreciation of the Brazilian real boosts its revenue, he said. "Braskem has always had a good reputation. It’s a solid, investment-grade company."

U.S. Plant

Braskem, which is completing a $5.2 billion petrochemical complex in Mexico in a venture with Grupo Idesa SA, is moving to get most of its sales overseas and reduce its exposure to Brazil’s slumping economy. The company expects its local market to account for as much as 49 percent of revenue in 2016, a record low, down from 52 percent this year and 57 percent in 2014, according to a presentation distributed to reporters last month.

Braskem is also planning to build a plant in the U.S. to convert low-cost natural gas into polypropylene used in plastic packaging and car parts. That would be the U.S. polypropylene industry’s first large-scale project to be built in about 12 years, according to the company.

"We are seeking to sell and produce resin abroad, as much as we can, to compensate for the decline in the internal market," Braskem CEO Carlos Fadigas told journalists in Sao Paulo last month. Braskem declined to comment on its share performance or the investigation involving its controlling shareholders.

Carwash

The sweeping corruption scandal, known as Carwash, has rocked Latin America’s largest economy. State-controlled Petrobras, which was once a major engine of Brazil’s growth and is now struggling as the world’s most indebted junk-rated company, is cutting billions of dollars of investments, helping to send unemployment to its highest level this decade. The real has tumbled 31 percent this year, the worst among major currencies worldwide, as the economy is forecast to shrink 3.19 percent this year and 2.04 percent in 2016, according to a Central Bank survey. Petrobras’s shares have tumbled 40 percent since the end of the first half.

Petrobras and Odebrecht didn’t immediately respond to requests for comment on the probes or the market’s reaction to the investigations.

Braskem was formed in 2001 after Odebrecht consolidated some acquisitions following the privatization of Brazil’s petrochemical industry. Petrobras, which owned 10 percent of the company, increased its stake through the combination of assets and a capital injection. Odebrecht and Petrobras now own a combined 74 percent of Braskem.

Higher Volumes

On June 19, Odebrecht’s then-CEO, Marcelo Odebrecht was arrested on allegations he took part in a cartel of builders to win contracts from Petrobras. A federal prosecutor said in July that Odebrecht allegedly paid bribes to secure preferential terms on a contract between Petrobras and Braskem. Braskem said in a statement at the time that negotiations with Petrobras to buy naphtha were similar to deals signed by its competitors. No Braskem executive has been accused of wrongdoings.

Third-quarter resins export volumes rose 43 percent compared with a year earlier, while sales in Brazil declined 8 percent, the company reported on Nov. 5. The currency depreciation also contributed because most of the company’s sales are denominated in dollars.

"Braskem is well positioned to take advantage of more robust growth in North America," said Bruno Piagentini, an analyst at the brokerage Coinvalores in Sao Paulo. "Investors also like companies with outward-oriented production at this moment as the real depreciates."

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