Petrobras’ Stock Plunges Due To Disappointing 3Q’16 Earnings; Company Sets An Optimistic Production Plan For Next 4 Years
Petroleo Brasileiro Petrobras‘ (NYSE:PBR) stock came crashing down on 10th November, when the Brazilian company reported a disappointing set of financial results for the September quarter [1]. Despite the recovery in commodity prices in the last quarter, the integrated energy company posted a net loss of 41 cents for the third quarter, as against market expectations of net profit of 13 cents. This huge earnings shock resulted in a severe investor sell off, causing Petrobras’ stock to plunge by close to 9% post the announcement of the 3Q’16 results.
Source: Google Finance
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Operational Highlights
The company recorded third quarter revenue of $21.69 billion, which was significantly lower compared to the consensus estimate of $25.3 billion. While Petrobras witnessed an improvement in its top line on a sequential basis on the back of higher production and better price realizations during the quarter, the company’s revenue continued to be much lower compared to the same quarter of last year.
Moreover, the oil and gas company’s failed efforts to control its operating costs resulted in a further contraction in its operating income. The company posted an operating loss of $3.4 billion, versus a profit of $2 billion in the previous quarter and $1.7 billion a year ago. This drastic fall in operating income was largely because of asset impairments of $4.7 billion and one-time charges of $3 billion booked during the quarter.
Source: Petrobras’ 3Q’16 Presentation
Despite the plummeting earnings, Petrobras’ cash flow position improved in the quarter. The company generated cash flows of $8.2 billion in the quarter, $2 billion higher compared to the previous quarter. Yet, the company’s overall debt has drastically increased compared to its ability to generate cash flows. Thus, the company is working towards reducing its Net Debt-EBITDA ratio from 5.3x in 2015 to 2.5x by 2018. For this, the energy company repaid a net amount of $3.7 billion of its long term debt during the quarter. While this is a positive step towards achieving its goal, there is still a long road ahead for the company.
Petrobras’ Net Debt to EBITDA Ratio
In addition to this, Petrobras has revised its capital spending budget for the period 2017-2021 to $74.1 billion from its prior guidance of $98.4 billion, representing a downward revision of 25%. This drop in capital expenditure will enable the company to better manage its cash flow position and weather the commodity downturn more efficiently. Furthermore, the company plans to raise around $20 billion through its partnerships and asset divestments to finance its capital spending needs over the next couple of years.
Overly-Optimistic Growth Targets
Despite reporting a weak third quarter, Petrobras continues to have an optimistic outlook for its production growth over the next 4-5 years. Based on the company’s latest presentation, the oil and gas major expects its liquids production from domestic operations to grow to 2.77 million barrels of oil equivalents per day (MMBOED), a jump of almost 34% over the next four years. Similarly, the company aims to increase its domestic natural gas production to 3.34 MMBOED during the same period. A growth of over 30% in the oil and gas output could be a great upside for any company in a strong price environment. However, we figure that this bullish growth target could be detrimental for Petrobras, as the commodity prices may not recover as fast as the company is anticipating.
Source: Petrobras’ Presentation at Rio Oil & Gas 2016 Expo & Conference
Have more questions about Petrobras (NYSE:PBR)? See the links below:
- Petrobras To Post A Strong Quarter Backed By Higher Realizations And Cost Savings
- How Will Petrobras’ Leverage Move In The Next Three Years?
- How Will Petrobras’ Oil & Gas Production Move In The Next Five Years?
- How Important Is The Upstream Business For Petrobras?
- How Will Petrobras’ Revenue Move If Crude Oil Prices Rebound Over The Next Two Years?
- How Will Petrobras’ Revenue Move If Crude Oil Prices Continue To Remain Depressed Over The Next Two Years?
- Is It Time For Crude Oil Prices To Recover?
- Petrobras’ 2Q’16 Earnings Plunge On The Back Of Lower Commodity Prices
- Here’s Why We Revised Petrobras’ Price Estimate To $11 Per Share
- How Are Petrobras’ Revenue & EBITDA Composition Expected To Change By 2020?
- What’s Petrobras’ Fundamental Value Based On Expected 2016 Results?
- By What Percentage Can Petrobras’ Revenues Grow Over the Next Five Years?
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Notes:- Petrobras To Announce Third Quarter 2016 Results, www.petrobras.com [↩]