Petrobras (PBR): A Solid Buy on Its Ambitious 5-Year Plan

Despite being involved in the multibillion-dollar Operation Carwash Scandal, facing challenges amid the resignation of its CEO Pedro Parente along with lousy Brazilian economy, Petrobras PBR seems to have managed to maintain its appeal to investors. The company appears to be a solid bet on the back of its ambitious five-year plan and encouraging portfolio of investments.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. On a year-to-date basis, shares of Petrobras have gained 49.2% vis-à-vis the stocks in the industry that have collectively rallied 36.4%.

 

 

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Analysts are displaying bullish sentiments on the stock, as is apparent from the upward revisions in earnings estimates. The Zacks Consensus Estimate of $1.70 for fiscal 2018 and $2.30 for 2019 has been revised upward by 6 cents and 31 cents, respectively, in the past 30 days.

Let’s delve deeper into the aspects that make this state-run company an attractive buy.

Robust Output Targets Amid Crude Rally and Impressive Portfolio

This year, crude has been displaying strength, courtesy of boom in oil demand, geo-political tensions and lower inventory levels amid OPEC production cuts, with oil prices comfortably trading above $70 a barrel of late. In tandem, natural gas prices have also started to pick pace since a few months. In fact, recently, prices of natural gas jumped to its highest in eight months, as inventories remained significantly below their five-year average, ahead of the upcoming winter. The increase in commodity prices are sure to drive the performance of the upstream segment of Petrobras.

Per its ambitious five-year plan (2018-2022), the Brazilian oil giant intends to boost average production to 3.5 million barrels of oil equivalent per day by 2022, translating into a CAGR of more than 6% over the next four years.The plan will be supported by the eight platforms going into production in 2018 and 11 more coming online by 2022.

Petrobras’ impressive portfolio of investments, particularly in Brazil’s pre-salt reservoirs, is likely to drive a major chunk of its sturdy production targets. Production from Brazil’s huge pre-salt oil reserves — which lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water — is estimated at 9.5-14 billion barrels of oil equivalent, providing Petrobras a competitive edge.

The company is entering into various strategic partnerships with foreign oil giants to drive exploration momentum. In this regard, Petrobras inked deals with major players like TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and Equinor ASA EQNR.

Sound Capex Program to Drive Performance and Revenues

In the wake of its aggressive growth plans and improving energy landscape, Petrobras now intends to increase its capital expenditure budget to $74.5 billion over the next four years. Notably, majority of its capex (around 80%) will be attributable to upstream operations, mainly the pre-salt projects. Apart from hefty spending in its production projects, Petrobras will invest around $13 billion in refining, transportation and marketing activities. Investments in pipelines, natural gas processing units and RNEST refinery will majorly drive its investment in downstream operations. The prudent capex program is in sync with ambitious production plans and is likely to boost the company’s top-line growth.

Debt-Reduction Plans and Operational Discipline Instill Confidence

Petrobras’ concentrated efforts to lower its leverage and boost liquidity through operational efficiency and divestment strategies bode well. The company targets to achieve a net debt to adjusted earnings before interest, tax, depreciation and amortization (EBITDA) ratio of 2.5 in 2018, which was as high as 5.3 in 2015. Petrobras has plans to reduce its operating expenses to $136.8 billion from $153 billion projected in the five-year plan earlier. Its divestment program of $21 billion throughout 2017-2018 is expected to support debt reduction. Petrobras aims to revive its financial health through divestments and spin offs, thereby gaining additional liquidity, as it intends to increase investment in ultra-deepwater projects.

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