Petrobras Price Estimate Slashed Based On Reduced Price Realizations, Depreciating Real And S&P Downgrade

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PBR
Petroleo Brasileiro

Petroleo Brasileiro Petrobras (NYSE:PBR) is a vertically integrated oil and gas company, which operates in both the upstream and downstream segments of the industry. The Brazilian multinational energy giant is one of the largest companies in Latin America by annual sales revenue. However, the extended period of low crude oil prices has hurt the company. The company’s realizations per barrel for both upstream and downstream segments are down drastically. Additionally, a falling domestic currency and the recent S&P downgrade are adding to the company’s woes. Consequently, we are revising our price estimate for Petrobras from $10.80 to $7.41 per share. The new price estimate is around 11.8x our 2015 full-year diluted earnings per share (EPS) estimate of $0.63 for the company.

See Our Complete Analysis For Petrobras

Price Realization Per Barrel For Both Upstream & Downstream Segments Hurting Petrobras

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Petrobras’ operations account for a large majority of the total oil and gas production in Brazil. Last year, Petrobras’ average daily crude oil production in Brazil was around 2,034 thousand barrels per day (MBD), more than 90% of Brazil’s total oil production. However, the extended period of low crude oil prices has hurt the company’s revenues in 2015. Even though Petrobras has increased daily crude oil and NGL production by 9% in 1H-2015 compared to 1H-2014, the company’s average price realized per barrel of oil equivalent (BOE) has dropped to $41 as compared to $80 in the previous year period. [1] The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year, due to the ongoing stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Petrobras’ Average Price Realized per BOE for upstream operations will amount to less than $50 for the year 2015 and will witness a gradual recovery throughout our forecast period.

A similar story has played out in Petrobras’ downstream operations as well and the company’s Average Price Realized per Barrel of Refined Product has come down from $128 in 1H-2014 to below $95 in 1H-2015. [1] We believe that this figure will remain below $95 for 2015 before staging a recovery in later years. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that Petrobras’ total revenue for the year 2015 will decline 28% and amount to $181 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

Negative Impact Of Falling Brazilian Real And S&P Downgrade

The Brazilian Real (BRL) has depreciated more than 30% compared to the US dollar since the start of the year and continues to drop. Additionally, S&P recently downgraded Petrobras to junk status after doing the same to Brazil’s sovereign debt. [2] We believe that these two developments will have a negative effect on Petrobras as the cost of servicing the company’s $134 billion debt will go higher. Petrobras will need to divert funds in order to cover its rising interest payments and this could hurt the company’s $130 billion spending plan for 2015-2019. Additionally, the investment plan assumed that the real would average 3.10 to the dollar in 2015 and 3.26 in 2016. [3] The real is currently touching 3.90 to the dollar which could reduce these calculations even further. Petrobras also seems unlikely to meet its goal of divesting $15.1 billion worth of assets by the end of 2016. [4] All this could lead to Petrobras not having enough liquidity to meet the requirements of its spending plan. Consequently, we have reduced the company’s capital expenditures, predominantly for the years 2015 and 2016. The reduced capex means that Petrobras will not be able to develop its reserves at our previously calculated pace. Hence, we have revised downwards the pace of growth in Average Daily Hydrocarbon Production for the later years.

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Notes:
  1. Petrobras SEC Filings [] []
  2. S&P Downgrades Brazil’s Petrobras to Junk Status, September 10, 2015, Wall Street Journal []
  3. Exclusive: Petrobras spending plan already obsolete, new cuts likely – sources, September 10, 2015, Reuters []
  4. Petrobras to slow asset sales, focus on cost cutting -source, September 14, 2015, Reuters []