Petrobras Price Estimate Slashed Based On Weak Near Term Outlook

-44.07%
Downside
14.59
Market
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Trefis
PBR: Petroleo Brasileiro logo
PBR
Petroleo Brasileiro

Petroleo Brasileiro Petrobras (NYSE:PBR) has had a challenging last few months. A falling domestic currency, the S&P downgrade, internal workforce tussles, and corruption allegations have contributed significantly to the company’s woes. Additionally, Petrobras has been hit hard by the current downtrend of low energy prices and its average price realizations for oil and natural gas have suffered in 2015.  As a result, we estimate that the company’s total revenue for the year 2015 will decline 33% and amount to $169.2 billion (Revenue figures not subjected to intersegment elimination). We believe that Petrobras will continue to operate in a challenging environment in the near term. Consequently, we are revising our price estimate for Petrobras from $7.41 to $5.85 per share. The new price estimate is around 13x our 2015 full-year diluted earnings per share (EPS) estimate of $0.44 for the company.

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Negative Impact Of Internal And Macroeconomic Problems

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After months of economic underperformance, S&P downgraded Brazil’s sovereign debt to junk status in September and subsequently did the same to Petrobras. [1] Additionally, the Brazilian Real (BRL) has depreciated more than 30% compared to the US dollar since the start of the year, and shows no signs of stabilizing. The S&P downgrade and fall in Real will have a negative effect on Petrobras, as the cost of servicing the company’s $127.5 billion debt will go higher. [2] Realizing that it will need to divert funds in order to cover its rising interest payments, Petrobras is striving hard to reduce its spending. In a revision to its Business and Management Plan 2015-2019, the company aims to shave off $11 billion from its capital spending, and $7 billion from total costs and expenses, excluding raw material purchased during 2015 and 2016. [3] The new investment plan assumes that the Real would average 3.28 to the dollar in 2015 and 3.80 in 2016. [4] However, the real is currently touching 3.85 to the dollar, which will surely negatively impact  2015 calculations. Additionally, Petrobras is sticking to its earlier divestment target of $15.1 billion for 2015-2016 but a senior company source has claimed to Reuters that the company seems unlikely to meet this divestment goal by the end of 2016. [5]

Petrobras is also experiencing internal workforce turmoil. The company just recently suffered through one of the most disruptive worker strikes in the past 20 years. The lockdown began on November 1 and ran for more than three weeks before finally coming to an end on November 23. [6] The strike resulted in a loss of output of 2.29 million barrels of oil and 48.4 million cubic meters of natural gas. Despite the loss of output, Petrobras maintains that it will be able to achieve its 2015 production target of 2.125 million barrels per day of oil in Brazil. However, it remains to be seen whether this resumption of normal operations is permanent, or whether the worker unions will go back to striking in the near future. The workers had gone on strike as they were protesting against the planned budget cuts and asset sales. This puts Petrobras in a catch-22 situation because even though the reduction in spending will affect the workers drastically, the company needs to implement its revised plans in order to survive the current oil price environment, and the persistent economic downturn in Brazil. However, the workers will be concerned about their interests foremost, and will not share in the company’s point of view. There is also the matter of an ongoing corruption scandal that allegedly has ties to the upper echelons of the Brazilian government. All this leads us to believe that Petrobras will continue to operate in a challenging environment for the next few months.

Lower Upstream Price Realizations Will Continue To Hurt Petrobras

Even though Petrobras’ hydrocarbon production has increased by 6% during the first nine months of 2015, the extended period of depressed oil prices has affected the company’s upstream operations significantly. The average domestic sales price for crude oil is down 53% for the year so far, which has translated into a 72% drop in upstream net earnings before certain items. [2] The average realizations from natural gas have also declined by 23% in 2015. We believe that the current low oil price environment will persist in the near term, as the ongoing production related stand-off between OPEC and Non-OPEC producers is creating excess supply in the global markets. Consequently, we believe that Petrobras’ Average Price Realized per BOE for upstream operations will amount to $47 for the year 2015 and will witness a gradual recovery during the later years of our forecast period.  Furthermore, we believe that Petrobras’ total revenue for the year 2015 will decline 33% and amount to $169.2 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

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Notes:
  1. S&P Downgrades Brazil’s Petrobras to Junk Status, September 10, 2015, Wall Street Journal []
  2. Petrobras SEC Filings [] []
  3. RPT-UPDATE 2-Brazil’s Petrobras cuts spending plan for 2nd time in 3 months, October 6, 2015, Reuters []
  4. Adjustments in the Business and Management Plan 2015-2019: Additional information, October 8, 2015, Petrobras Press Release []
  5. Petrobras to slow asset sales, focus on cost cutting -source, September 14, 2015, Reuters []
  6. End of Oil Workers’ Strike, November 23, 2015, Petrobras Press Release []