A Look At Our $15 Price Estimate For Petrobras

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PBR: Petroleo Brasileiro logo
PBR
Petroleo Brasileiro

Petroleo Brasileiro Petrobras (NYSE:PBR), has seen solid growth in the recent quarters, led by better price realization for its upstream business. Oil prices have seen a strong move this year, amid lower inventory levels due to OPEC production cuts, and other geopolitical factors. 2017 was a good year for oil companies, as growth in benchmark crude prices aided their margins. Similarly, in 2018, the average Brent crude oil price is expected to average around $71, representing a 30% jump from the 2017 average. Accordingly, we expect Petrobras to do well in 2018. We have created an interactive dashboard analysis which you can use to arrive at your own price estimate for the company by modifying the various drivers.

Expect Upstream & Downstream Business To Perform Well In 2018

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We estimate the Exploration & Production (E&P) revenues to grow in mid-single digits in 2018. While we don’t expect much change in the production, as guided by the company, we forecast a mid-single digit growth in the average price realization for both domestic as well as the international business. Our forecast is based on the fact that OPEC and its allies have committed to production cuts throughout 2018, which will result in lower inventory levels. This, in turn, will likely keep oil prices higher, as compared to the prior year. Having said that, there is a risk of OPEC changing its course, given a surge in oil exports from the U.S.  OPEC will decide on its policy on June 22. While OPEC aims to stick to its production cuts throughout 2018, it may make gradual adjustments to offset any supply shortage. This could result in increasing oil production by around 1 million barrels a day, according to a media report. Benchmark Brent oil price currently trades around $77, after crossing the $80 mark earlier in the month. We don’t expect any significant decline in oil prices in 2018, given that any diplomatic conflict with Iran over the  nuclear deal could result in supply cuts. In fact, this was the reason why oil prices moved to multi-year highs earlier in May. Price realization for oil companies is strongly correlated to the benchmark oil prices. If oil prices remain high in 2018, it would benefit oil companies, such as Petrobras.

Looking at the company’s other segments, we expect higher oil prices to drive downstream business top line growth. We don’t expect any significant growth for downstream volume, given that higher oil prices will likely impact the overall demand. However, it will boost the average price realized for refined products, thereby aiding the segment revenue growth.

The company appears to be on a good run in the recent past, and we believe that there is still some upside to the stock price. Our $15 price estimate for Petrobras is based on $1.30 expected EPS in 2018, and a price to earnings multiple of 11.5x. Our EBITDA forecast of $57.9 billion represents year-on-year growth of around 3.5%. Of the total expected EBITDA in 2018, we estimate $29 billion in the company’s  upstream segment, $24 billion in downstream segment, and Gas, Power & Biofuel making up for the rest. Our price estimate of $15 for Petrobras is at a 20% premium to the current market price.

Our price estimate also takes into account the company’s capital investment plan. In the wake of the improving commodity markets and its aggressive growth plans, Petrobras now aims to spend $75 billion in capital expenditure over the next 3-4 years. Since exploration and production of oil and natural gas is Petrobras’ core business, more than 80% of this capital budget will be spent on its upstream operations.

Note: The revenue figures shown on the interactive dashboard are gross revenues, and include intersegment revenues, to better understand the company’s businesses.

 

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