SHEL - Petrobras: News About Dividend Policy And Renewable Energies

2023-08-02 07:04:48 ET

Summary

• Petrobras has lowered its target payout policy from 60% to 45% of free cash flow but will consider share buybacks.
• The company's financial progress is positive, with significant debt reduction and increased earnings estimates.
• PBR stock is entering the renewable energy sector and has signed a letter of intent to study offshore wind projects.

Investment Thesis

Petrobras ( PBR.A , PBR ) recently lowered their target payout policy from about 60% to 45% of the free cash flow. However, in the same news, it was announced that share buybacks will also be considered from now on. Furthermore, there is news about the entry into renewable energies. All in all, from my point of view, there is no reason to worry. The shares remain cheaply valued and will continue to pay high dividends. In addition, the company is in an excellent financial position thanks to a massive debt reduction that saves $3 billion in interest payments compared to 2017. Despite the 40% increase in the share price this year, the share remains a clear buy for me.

Financial Progress & Trends

First, a short overview over a longer period for revenues, expenses, and net income.

In the following 10-year chart, we can see the enormous debt the company has repaid. In the meantime, the company is doing very well financially and significantly better than it had set itself as a target just over a year ago. Therefore, debt reduction is slowing down, and capital can be used differently.

Of course, this is also accompanied by savings on interest and is, therefore, excellent news for shareholders looking for dividends. Because one of the fears was that under the new president, Lula, the dividend would be much lower in the future, and instead, much more focus would be placed on investments in renewable energy, following the example of European companies such as Shell ( SHEL ) or Equinor ( EQNR ). The following chart shows how much interest payments are saved compared to 2017, a whole $3B.

Earnings estimates

When I looked at my last article about the company from May 2023, I noticed that analysts have also increased their forecasts for the next few years. Of course, it's generally the case that estimates are tough because revenues depend so much on the global oil price and also the Brazilian diesel prices and if there are political interventions. The first of the following two images are the estimates from May, and the second are the current ones.

Update on the dividend policy and renewables

There is news on the company's dividend policy. As most readers of this article know, Petrobras has returned incredibly high dividend yields in 2022 due to its record earnings and low valuation. There were some changes announced.

Brazilian state-run oil firm Petrobras' board of directors on Friday approved a new shareholder remuneration policy that will trim its hefty dividend and allow share buybacks, according to a securities filing.

Under the new policy, Petrobras' quarterly dividend will have to be at least 45% of its free cash flow, down from the current 60%, when the firm's gross debt is below $65 billion.

It will also allow the company to repurchase shares.

reuters.com

As we can see, there is no reason to worry. Shareholders would also benefit significantly from share buybacks, as would the Brazilian government. Furthermore, debt is well below $65B. Given the extremely low valuations in 2022, it raised the question of whether a mix of dividends and share buybacks would not be a better capital allocation anyway.

Overall, I have argued in the past that the company will likely also go down the renewable energy path. I think there is no need to think in extremes. Some people hate oil, and others love oil and hate renewables. Both can co-exist within the same company. Renewables have a lower return-on-invested-energy than oil, gas, and coal, but overall they work and diversify the energy mix. The construction of offshore wind farms is not a cash burn but instead creates future cash flows and diversification for the company. Due to its geographic location with a long coastline, lots of sunshine, and cheaper workforce, the company should achieve even better cash return rates than most European renewable projects. On this subject, there was an announcement in March of this year, which probably leaves no doubt that the company will invest in this area.

And now it seems that under the helm of Prates, the company is actively pursuing a major expansion of renewable energy assets. On Monday, Petrobras signed a letter of intent with Norwegian oil major Equinor to study the feasibility of another seven strategic offshore wind sites, expanding the partnership the companies signed in 2018. According to Petrobras CEO Prates, the seven new offshore wind projects would have a combined generation capacity of 14.5 GW, and the cooperation agreement will be effective until 2028. According to Reuters, the new wind farms would take six to 10 years to begin generating electricity.

oilprice.com

Oil price

Overall, oil producers benefit significantly from the fact that OPEC member states themselves want to establish a kind of lower price cap on oil. For this purpose, they reduce their production to stabilize the oil price or to let it rise. This year alone, Saudi Arabia has done this twice.

Saudi Arabia announced Sunday that it would begin cutting oil production by 1 million barrels per day in July to support the "stability and balance of oil markets."

npr.org

Valuation & Production

The company's valuation is not quite as low as it was for most of 2022 after this year's 40% increase in the stock price due to easing concerns about President Lula's new policies.

However, the share is still very cheap compared to most Western companies. Of course, companies are never quite comparable 1 to 1, and the risks differ, but I still find the following comparison interesting.

The financial figures for Q2 2023 are not yet published, but the company released its production figures a few days ago. However, I do not want to go into detail here as these fluctuate by a few percent every quarter. Anyone who wants to learn about this in detail can do so on the Petrobras website . However, here is a brief summary:

• In Q2 2023, the average production of oil, NGL, and natural gas reached 2.64 MMboed, a 1.5% drop compared to Q1 2023, primarily due to stoppages, maintenance, mature field decline, and divestments
• Pre-salt production set a new quarterly record of 2.06 MMboed, equivalent to 78% of Petrobras' total production
• "In 1H23, S10 diesel sales had a 62% share in Petrobras total diesel sales, a new semester record. S10 diesel production registered a record in 2Q23 of 419 mbpd, with a monthly peak of 442 mbpd in June"

Risks

Residual risks of further political changes remain, even if they have become smaller. We still have to keep in mind that the company once introduced a dividend policy at the end of 2022, which has now been changed and may be changed again next year. The company is in a good financial position but is still very dependent on global oil prices and local diesel prices. Suppose these develop badly or are kept low by political decisions, and the company invests money simultaneously in building renewable energies. In that case, there may be years when little money is left for dividends.

Overall, I consider the risks, including the political risks, to be manageable since the Brazilian government is still the biggest beneficiary of the dividend.

Share dilution, insider trades & SBCs

These three things are standard checks I make in every article. But in this case, there is not much to report because there is no insider selling, and the number of outstanding shares has been constant for years. As shown earlier, shareholders maybe can expect share buybacks in the future.

Conclusion

There are many positive developments for the company and the shareholders as well. The planned dividend payout has been slightly lowered, but this is not a real problem; it leaves more money for investments or share buybacks. But the huge debt reduction, the fact that the world will need oil for decades, and Brazil's general potential with its young population suggest that this is an investment that shareholders can potentially hold for decades. Petrobras is one of my largest positions and, from my point of view, continues to be a clear buy.

Finally, a word about the tickers PBR.A (preferred shares) and PBR (common shares), as this question sometimes comes up. PBR.A is a bit less liquid and trades lower, which increases the dividend yield.

Petrobras 'common share (ON - symbol in [B] ³: PETR3) allows the exercise of voting rights at Shareholders' Meetings.

The preferred share (PN - symbol in [B] ³: PETR4) is not entitled to vote. In return, the holders of preferred shares have other advantages, among which it is possible to highlight the right to receive their dividend as a priority and in the minimum percentages established in the Bylaws, as long as the Company calculates profit in the fiscal year.

Petrobras common questions

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