CA - Petrobras: Prates Ousting Breaks Uneasy Balance Between Government And Shareholder Interests

2024-05-20 17:28:40 ET

Summary

• Petrobras reported a softer Q1 with profits down ~38% YoY as higher refining costs and lower product volumes cut Downstream profits by 37%.
• Following the earnings release, the company announced it would part ways with CEO Jean Paul Prates who had recently clashed with the government in a dispute over dividend payments.
• Successor CEO Magda Chambriard is well-aligned with the government and has been a vocal supporter of additional investments, likely pushing future capex higher and depressing FCF.
• Following ADNOC dropping as a bidder, Petrobras management now "does not rule out" acquiring a Braskem stake itself which I further view as more politically than financially motivated.
• With the uneasy balance between government and shareholder interests tipping towards the government, I reiterate my cautious stance and see the possibility of shares rerating lower.

I initiated my coverage of Brazilian state-controlled Oil & Gas major Petrobras ( PBR ) (PBR.A) in early March , with an Underweight rating which was based on 1) a drastic increase in proposed capex for renewables; 2) a lowered dividend payout ratio which put shares largely on par with Western IOCs in terms of total shareholder yields; and 3) a valuation multiple that had significantly expanded since the Lula election, and in my view did not accurately reflect political risk anymore. On May 14, the company released its Q1 results, reporting YoY declines across the income statement with a significant 38% drop in net income vs. Q1 23 to $4.6B....

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