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Petrobras' (PBR) Strategic Strides Make it a Compelling Buy

Zacks Equity Research

It seems that Petrobras PBR has managed to emerge from the multibillion-dollar Operation Carwash Scandal, and is currently riding high on the back of its impressive portfolio and strategic initiatives. Cost-containment efforts and ambitious divestment plans have been helping the company to trim its debt and improve credit ratings. Such upsides have kept the stock in investors’ good books. Notably, shares of the Brazilian oil giant have rallied 31% over the past three months, outperforming its industry’s 22% cumulative growth.


Let’s take a closer look at the factors that have helped the company maintain its appeal among investors.

Divestments and Cost Discipline Paying Off

While Petrobras’ involvement in the massive corruption scandal of 2014 had been a major overhang for the firm, scarring its credit metrics, things have finally started looking up. One cannot deny that the state-owned energy giant has been making serious efforts to trim its leverage metrics. Notably, while the company’s net debt of $100 billion peaked in 2015, concentrated efforts to lower its leverage, and boost liquidity through operational efficiency and divestment of non-core assets have helped Petrobras to deleverage to a considerable extent. Its net debt declined to $69.4 billion in 2018, decreasing from $84.9 billion a year ago and $96.4 billion in 2016.

Just a week back, the company announced its intent to rev up its five-year divestment plan of $26.9 billion to further trim its debt load, streamline portfolio and sharpen focus on other profitable segments for achieving top-tier results. In fact, Branco, Petrobras’ CEO, aims to divest around $10 billion of assets by April 2018. This signals the divestment of TAG assets worth $8 billion, which had been stalled by the court earlier. The bidding for TAG pipeline network has been reopened again and is set to give a new boost to the divestment targets of the firm. 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 plans to slash operating expenses by $8.1 billion from the original projection of $122.6 billion for its five-year plan through 2023.

Markedly, in 2018, Petrobras registered its first annual profit in five years, reflecting the firm’s cost discipline, as well as reduction in debt and interest payments. On a further encouraging note, Petrobras’ rating recently got upgraded owing to improved liquidity.

Impressive Portfolio Boosts Output Targets

Boasting a lucrative portfolio, particularly in Brazil’s 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.The firmis in an enviable position to maintain an impressive production growth profile for years to come. Per its ambitious five-year plans, 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.

Ambitious Capex Program to Drive Top Line

In the wake of its aggressive growth plans, Petrobrasintends to invest $84.1 billion between 2019 and 2023, representing nearly 13% increase from projected investment of $74.5 billion in the 2018-2022-time frame.

While more than 80% of the company’s investment will be targeted toward upstream activities, nearly $13.9 billion is likely to be spent on refining and natural gas, up from $13.2 billion projected in the previous five-year plan.The state-controlled energy firm intends to boost its position in the refining and petrochemicals market, and establish itself as a more competitive and an efficient business. Investments in pipelines, natural gas processing units and RNEST refinery will majorly drive its investment in downstream operations. The company intends to optimize its natural gas market, and tap into the profitable renewable energy market with primary focus on solar and wind energy, which is the need of the hour.

Final Thoughts

While the company’s share price bottomed out in 2016 to as low as around $3, it has been on a gradual recovery road since then owing to improving operations and cash flows, along with management’s prudent initiatives and ambitious targets. Although Brazilian government’s political interference and poor corporate governance history remain concerns, we believe that the Zacks Rank #2 (Buy) company will be able to tide over these risks and maintain its bullish run. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Petrobras’ committed efforts to improve production, liquidity and operational efficiency, along with its ambitious five-year plans make us optimistic of the stock.  

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