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Petrobras (PBR) Up 24% Over a Year: What's Going in its Favor?

Zacks Equity Research

Petróleo Brasileiro S.A. or Petrobras PBR has been in investors' good books for quite some now, as is evident from its shares’ 24% rally over a year, outperforming the industry’s cumulative growth of 11.5%.

 


Despite being scarred by corruption scandal, the Brazilian energy giant is riding high on the back of its impressive portfolio, debt-reduction efforts and ambitious five-year plans. The company also displays an impressive earnings surprise history, having surpassed estimates in three out of the trailing four quarters, with average of 23.94%, primarily on the back of improved crude prices. On a further encouraging note, Petrobras’ earnings and revenues are expected to witness year-over-year growth of 10.56% and 23.34%, respectively, in 2019.

Considering Brazil's huge pre-salt oil reserves, estimated at 9.5-14 billion barrels of oil equivalent and widely thought to be the most important oil find in the recent years, Petrobras is in an enviable position to maintain an impressive production growth profile for years to come. Boasting a lucrative portfolio, particularly in the pre-salt reservoirs that lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water, Petrobras intends to sharpen its focus on these exploration areas. Per its ambitious five-year plans (2019-2023), the company intends to boost average production in 2019 to an expected 2.8 million barrels of oil equivalent per day, with 5% average annual growth till 2023. The plan will be supported by the 13 new platforms coming online by 2023.

Petrobras is entering into various strategic partnerships with foreign oil giants to drive exploration momentum. In this regard, the company has inked deals with major players like TOTAL S.A. TOT, Royal Dutch Shell plc RDS.A and Equinor ASA EQNR. Petrobras’ intention to tap into the profitable renewable energy market, with primary focus on solar and wind energy, also bodes well. In fact, just a couple of days back, the company inked a JV deal with TOTAL to develop more solar and wind projects.The state-controlled energy firm intends to maximize its position in the refining and petrochemicals market, and establish it as a more competitive and an efficient business.

Further, Petrobras has been making serious efforts to trim its leverage metrics. As of Sep 30, Petrobras had a net debt of nearly $73 billion, down from $84.9 billion at the end of 2017 and $96.4 billion on Dec 31, 2016. The company has a target of achieving a net debt to EBITDA ratio of less than 1.5 in 2020 compared with 2.9 as of Sep 30, 2018. Petrobras’ divestment strategies bode well. It intends to exit non-core businesses like fertilizer plants, liquefied petroleum gas unit, as well as biodiesel and ethanol businesses, in an effort to streamline portfolio and sharpen its focus on other profitable segments for achieving top-tier results. Additionally, the Zacks Rank #3 (Hold) company expects its return on invested capital to top 11% in 2020. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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