Petrobras Posts A Sharp Improvement In Its 2016 Profits But Misses Consensus Expectations

-44.07%
Downside
14.59
Market
8.16
Trefis
PBR: Petroleo Brasileiro logo
PBR
Petroleo Brasileiro

Petroleo Brasileiro Petrobras‘ (NYSE:PBR) stock price rallied more than 3% earlier this week, when the Brazilian integrated energy company posted a strong set of financial results for the December quarter and full year 2016((Petrobras Announces December Quarter 2016 Results, 22nd March 2017, www.petrobras.com)). While the company missed the consensus expectations on both revenue and earnings fronts, it displayed an impressive improvement in its profitability driven by the recovery in commodity prices in the second half of 2016. Given the enhanced outlook of the commodity markets, the oil and gas company expects its domestic liquids production to increase to 2.77 MBOED by 2021, growing at a compounded annual growth rate of roughly 7.5% per year. Further, in order to augment its production growth targets, the company has marginally increased its capital spending budget for the next 3-4 years, with continued focus on exploration and production activities.

PBR-Q&A-4Q16-3

Operational Highlights

Relevant Articles
  1. Hess Corporation Stock Is A Risky Bet
  2. More Room For Growth In Enterprise Products Stock?
  3. Williams Companies Stock To Gain With Rising Natural Gas Demand
  4. Why Hess Corporation Stock Is A Good Bet In The Battered Energy Sector
  5. Down 50% This Year, Occidental Stock Has A Long Road To Recovery With Sizable Downside Risk
  6. Petrobras’ Revenue Is Looking Up With Tailwind From The Brazilian Economy

With the bounce back in commodity prices in the fourth quarter, Petrobras witnessed an improvement in its average price realization for the quarter. However, this was not complemented by a similar rise in its total production, causing its 4Q’16 revenues to remain marginally lower compared to the previous quarter. For the full year, too, the oil and gas producers’ production remained almost flat, and the persistently low commodity prices during the year resulted in a notable decline in its top-line compared to the last year.

That said, Petrobras made significant progress to bring down its operating costs to boost is dwindling profitability. During the year, the Rio de Janeiro-based company managed to reduce its SG&A expenses, and manageable operating costs by 6% each. Further, the company’s lifting cost, associated with its oil and gas production, fell around 11% during the year and averaged at $10.30 per barrel of oil equivalent (boe) for the year. In fact, these costs stood at under $8 per boe in its pre-salt plays, making them highly profitable for the company. As a result of these cost control initiatives, Petrobras posted an operating profit of $4.3 billion for the full year 2016, as opposed to an operating loss of $1.1 billion in the last year.

PBR-Q&A-4Q16-7

Financial Highlights

With the improvement in the company’s profitability, Petrobras has also seen a solid recovery in its declining financial position. The company, which is believed to be the world’s most indebted publicly listed energy company, has finally managed to bring down its total debt (long term plus short term) to $118 billion, versus $126 billion a year ago. The company utilized its improved cash flows and proceeds of its divestment program to repay its debt and boost its capital structure. As a result of this decline in the company’s debt obligations, its Net Debt to EBITDA ratio has dropped from 5.11 at the end of 2015 to 3.54 at the end of 2016. While this means that the company is advancing well towards a more lean capital structure, it has a herculean task ahead of it before it achieves the target of a Net Debt to EBITDA ratio of 2.5 times by 2018.

PBR-Q&A-4Q16-6

Going Forward

As the outlook for the commodity markets has improved, many of the oil and gas majors, including Petrobras, have increased their exploration and production budget for the coming years, in order to leverage the rebound in the commodity markets. Thus, Petrobras, which had previously revised its capital spending budget for the next four years from $98.4 billion to $74.1 billion, has revised its capital expenditure target upwards to $74.5 billion for the period 2017-2021. That said, more than 80% of this capital budget will continue to be spent on its upstream operations.

Petrobras’ Capital Spending Budget 2017-2021 ($ Billion)

PBR-Q&A-4Q16-4

In addition to this, Petrobras has raised its goal for asset divestment and partnerships for 2017-2018 from $19.5 billion to $21 billion. While this is partially because the company was unable to meet its asset sale targets last year, it is somewhat indicative of the company’s willingness to streamline its portfolio and expand its operations by entering into partnership with its peers.

Conclusion

As Petrobras has laid down a clear strategy to improve its operational as well as financial performance in the coming years, we believe that the recovery path of the commodity markets, coupled with the execution skills of the company, will play a crucial role in deciding the future of the company. However, the company’s reputation of being involved in scandals and unfair practices could work against it, if the company does not take corrective measures to improve its image.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research