Will Petrobras Achieve Its Leverage Targets And Enhance Shareholder Value?

by Trefis Team
-25.46%
Downside
15.49
Market
11.55
Trefis
PBR
Petroleo Brasileiro Petrobras
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Ever since the commodity markets went into a slowdown, investors have been wary of Petrobras (NYSE:PBR) because of the huge debt burden on its books. As a result, the Brazilian integrated energy company has been actively reducing its debt obligations to optimize its capital structure and enhance its shareholder returns. Year-to-date, the company has made strong progress in bringing down its gross debt to achieve its targeted net debt to adjusted EBITDA ratio of 2.5x by the end of 2018. Consequently, the stock has jumped more than 50% since the beginning of the year. Below, we discuss how the company plans to meet its leverage target and enhance shareholder value.

We have a price estimate of $12 per share for the company, which is higher than its current market price. View our interactive dashboard – Petrobras’ Price Estimate and modify the key drivers to visualize their impact on its valuation.

Petrobras is the world’s most indebted integrated energy company with a net debt of around $75 billion at the end of the second quarter of 2018. The company is aware of the downside of a debt-heavy balance sheet and has been working consistently to reduce its debt obligations and optimize its capital structure to enhance its shareholder returns. For this, the company has set an objective to bring down its financial leverage, measured by Net Debt-to-Adjusted EBITDA ratio, to 2.5x by the end of 2018.

Petrobras has managed to reduce its debt obligations to $92 billion at the end of 2Q’18 from $108 billion at the beginning of the year. The reduction in the long term debt has been financed largely by the company’s strategic partnerships within and outside Brazil, and divestment program. The company plans to raise $21 billion from these strategic partnerships and divestment program between 2017-2018. Of this, the company has already monetized $11.2 billion since 2017, which has enabled it to pare down its debt notably. These deals have not only allowed Petrobras to raise funds to improve its capital structure but have also enabled it to enter into partnerships with large companies such as Exxon Mobil, BP, and Total, which will help the company in the long term. Apart from reducing the credit risk for the company, lower debt levels will enable Petrobras to bring down its interest expense, which is likely to boost its bottom-line in the coming quarters.

As per its latest presentation, the company is on track to achieve its leverage target on time. Further, the company aims to converge its capital structure with that of the overall average of the industry by 2022. Based on our estimates, we expect the company to achieve its targeted leverage ratio by 2018. However, the company’s target beyond 2018 will be highly dependent on the recovery of commodity prices as well as its execution capabilities.

 

Do not agree with our forecast? Create your own price forecast for Petrobras by changing the base inputs (blue dots) on our interactive dashboard.

 

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