On Apr 11, 2014, we issued an updated research report on Petroleo Brasileiro SA or Petrobras (PBR). Petrobras – the largest publicly-traded Latin American oil company − produces and refines almost the entire crude oil and natural gas of Brazil. However, we are concerned about Petrobras’ declining production trend.
In the 2030 Strategic Plan, Petrobras − a Zacks Rank #3 (Hold) stock − revealed its ambition to place itself among the top five integrated oil firms in the world by 2030. To support it, the company aims to increase daily oil production to 4.0 million barrels of oil per day (MMbpd) from 2020.
We appreciate the company's initiative to cut operating expenses through a cost optimization program which helped Petrobras slash operating costs considerably in 2013.
Petrobras has divested several non-core assets since the restructuring of its divestment program in 2012. The sales reflect the company’s intention to focus on properties that have greater potential to generate cash flow for its shareholders.
However, in 2006, Petrobras bought a refinery after paying considerably more than its actual worth. Notably, the company is justifying the buy stating that the refinery was bought judging the best interest of shareholders but the recession prevented the company from reaping the desired profits from the refinery.
Moreover, the Brazilian government, which is a majority shareholder in Petrobras, has interfered in Petrobras’ affairs, time and again. We do not expect any turnaround in this situation in the short- to medium-term. Consequently, this may impact the company’s performance since government interest might not coincide with that of minority shareholders.
Stocks That Warrant a Look
One can consider better-ranked players in the energy sector like Range Resources Corp. (RRC), Helmerich & Payne Inc. (HP) and Pioneer Energy Services Corp. (PES). These stocks all sport a Zacks Rank #1 (Strong Buy).