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Strict Cost Control to Drive Petrobras (PBR) Q4 Earnings

Nilanjan Choudhury
With negative earnings revisions, the healthcare sector is expected to witness earnings growth of 1.8% in the first quarter, suggesting smooth trading for healthcare ETFs.

We expect Petróleo Brasileiro S.A.or Petrobras PBR to beat expectations when it reports fourth-quarter 2018 results after the closing bell on Wednesday, Feb 27. The current Zacks Consensus Estimate for the quarter under review is a profit of 45 cents per ADR on revenues of $24.2 billion.

In the preceding three-month period, the Rio de Janeiro-headquartered energy giant missed the consensus mark by 25.7% due to lower oil and gas production.

As far as earnings surprises are concerned, the Brazilian state-run integrated player has a good record, having gone past the Zacks Consensus Estimate thrice in the last four reports.

Investors are keeping their fingers crossed and hoping that the company can continue winning ways by surpassing earnings estimate this time around too. Thankfully, our model indicates that Petrobras might beat on earnings in the fourth quarter.

Let’s delve deeper and find out the factors impacting the results.

Why a Likely Positive Surprise?

Our proven model shows that Petrobras is likely to beat the Zacks Consensus Estimate this quarter as it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and Zacks Rank #3 (Hold) or higher for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +31.11%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Petrobras currently has a Zacks Rank of 3, which, when combined with a positive ESP, makes us confident of an earnings beat. 

Note that we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

What is Driving the Better-Than-Expected Earnings?

The strict cost control and the commencement of production from the P-69 floating platform in Brazil’s Lula field should lead to solid earnings growth.

Over the first nine months of 2018, Petrobras was able to contain G&A, lifting cost per barrel and domestic refining cost per barrel by 6%, 1% and 4%, respectively. This helped to keep operating costs under control. We expect Petrobras to continue with its strong expense control discipline, which would drive the bottom line.  

Despite the declining trend over the past few quarters, the production outlook for Petrobras looks very positive thanks to its encouraging portfolio of investments, particularly in Brazil’s pre-salt reservoirs that lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water. The company is the operator in most of these exploration areas and holds interests in them ranging from 20% to 100%.

Notably, the Brazilian oil giant’s fourth-quarter production volumes should benefit from the October start-up of platform P-69 in the Lula field, as well as the conclusion of maintenance stoppages at a number of platforms in the Santos and Campos basins. 

Finally, at the end of September 2018, the company had net debt of $72.9 billion, decreasing from the $84.9 billion at the end of 2017 and $96.4 billion as of Dec 31, 2016. This has led to considerably lower interest outgo and another positive for Petrobras’ profitability.

Other Stocks to Consider

Petrobras is not the only energy company looking up this earnings season. Here are some firms from the space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Gulfport Energy Corporation GPOR has an Earnings ESP of +10.05% and a Zacks Rank #3. The company is slated to release earnings on Feb 27. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denbury Resources Inc. DNR has an Earnings ESP of +14.29% and a Zacks Rank #3. The company is anticipated to release earnings on Feb 27.

Southwestern Energy Company SWN has an Earnings ESP of +6.06% and a Zacks Rank #3. The company is expected to release earnings on Feb 28.

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Southwestern Energy Company (SWN) : Free Stock Analysis Report
 
Petroleo Brasileiro S.A.- Petrobras (PBR) : Free Stock Analysis Report
 
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