2023-11-13 09:00:00 ET
Summary
- Petrobras investors have outperformed their energy sector peers with a 1-year total return of over 90%, dismantling the bearish thesis convincingly.
- The company's relatively attractive valuation and strong production outlook have bolstered investor confidence. However, growth headwinds relating to its CapEx spending need to be considered.
- Petrobras has benefited from Brazil's falling inflation rates, as the "Lula discount" likely declined. However, PBR has struggled to regain its upward momentum above the $16.5 level.
- I argue why PBR is still a rock-solid buy at steep pullbacks but not at the current level.
Petróleo Brasileiro S.A., or Petrobras (PBR) investors, have outperformed their energy sector (XLE) peers over the past year. Notwithstanding the fears surrounding potential headwinds emanating from President Lula's administration since he took office in January 2023, the market has shrugged it off. Accordingly, PBR delivered a 1Y total return of more than 90%, underscoring investors' confidence at its late 2022 lows.
In addition, PBR's relatively attractive valuation bolstered buyers' thesis that much pessimism was reflected at those levels as Petrobras underwent a top leadership reshuffle. The bearish thesis at those levels has failed to pan out, as Petrobras has not undertaken drastic changes that could threaten the viability of its highly profitable upstream segment.
I last covered PBR in early September, highlighting why " the bearish thesis on PBR stock is falling apart piece by piece, suggesting the next steep pullback should be capitalized." Accordingly, that thesis panned out as PBR pulled back toward its early October lows, attracting dip buyers back into the fold. As such, I gleaned aggressive dip-buying momentum as investors were satisfied with the constructive progress in Brazil's economy.
Accordingly, Brazil's central bank is expected to " implement two more half-point rate cuts in consecutive meetings" as Brazil's inflation rates have fallen markedly. Therefore, it has mitigated the headwinds over the company's pricing levers as Brazil manages to get its inflation challenges under control. Notably, "Brazil's annual inflation rate decreased more than expected, approaching the target range."
With that in mind, investors have likely refocused on PBR's operating performance and less on the "Lula headwinds." Accordingly, Petrobras's adjusted EBITDA fell nearly 28% YoY, as lower oil prices affected its profitability. Despite that, Petrobras raised its production, helping to mitigate these challenges.
In addition, management provided a constructive production outlook for 2023, raising its guidance from 2.6M boe per day to 2.8M boe per day. Petrobras demonstrated its ability to continue its strong Q3 performance throughout the year, justifying PBR's outperformance relative to its peers.
Also, Petrobras's dividend payout of about BRL 1.34 per share aligns with its revised guidance of a payout ratio limited to 45% of its free cash flow. It also lifted investors' sentiments further by conducting its shares repurchase program, returning about BRL 17.5B to shareholders in Q3.
Despite that, the company's adjusted EBITDA reduction was broad-based, impacting its highly profitable E&P segment. However, Petrobras's highly-advantaged pre-salt assets helped with its production increase, mitigating the price decline. Accordingly, Petrobras's "pre-salt production reached 2.25 MMboed, accounting for 78% of the total production."
PBR Quant Grades (Seeking Alpha)
With a best-in-class "A+" profitability grade, PBR is still priced attractively ("A-" valuation grade) relative to its energy sector peers. In addition, its robust "A" momentum grade suggests investors rotated back into PBR, improving investors' confidence about buying significant dips on its uptrend bias.
However, PBR's "F" growth grade suggests Petrobras isn't immune to possible production headwinds as the company potentially restructures its CapEx spending. As such, the market likely reflected a steep discount, pricing in potentially significant changes to its CapEx roadmap, suggesting a higher allocation to longer-duration energy transition spending.
Notwithstanding that caution, I ascertained that PBR is expected to remain a dip-buyers' favorite relative to its leading integrated oil and gas peers, given its valuation appeal.
PBR has a critical resistance zone at the $16.5 level, which has resisted its upward momentum since early 2022. The recent October 2023 high also rejected further buying momentum at that level, suggesting investors could continue to use that zone for profit-taking opportunities.
As highlighted earlier, I expect the market to continue reflecting a steep discount against its uncertain growth factors, given the potential restructuring of its CapEx spend. Also, PBR's price action suggests it has struggled to regain its upward trajectory, even though it has recovered its medium-term uptrend.
In other words, investors should remain patient and wait for its next steep pullback before pulling the buy trigger.
Rating: Maintain Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Petrobras: Gained 90% Over One Year - Don't Expect The Same