Petroleo Brasileiro S.A. ADR C

Transcription

1 February 09, 2015 Petroleo Brasileiro S.A. ADR C (PBR-NYSE) NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 02/09/2015 Current Price (02/06/15) $6.54 Target Price $6.75 SUMMARY We are upgrading the Brazilian state-run energy giant Petrobras to Neutral from Underperform, despite a miss in its delayed third-quarter results. The company announced several initiatives like reduction in its 2015 exploration spending and asset sales to tackle its liquidity problems. Moreover, a change in management as several people associated with the multibilliondollar money laundering case were removed from position could bring good tidings for the firm. However, since the third-quarter result did not include any picture of the scandal or estimate of its impact, the company s credibility remains a question. As such, we remain apprehensive of the stock performance in the near-term. SUMMARY DATA 52-Week High $ Week Low $6.01 One-Year Return (%) Beta 1.86 Average Daily Volume (sh) 45,763,224 Shares Outstanding (mil) 6,522 Market Capitalization ($mil) $42,656 Short Interest Ratio (days) 3.21 Institutional Ownership (%) 7 Insider Ownership (%) N/A Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.7 Earnings Per Share (%) N/A Dividend (%) using TTM EPADR 4.9 using 2015 Estimate 5.1 using 2016 Estimate 4.4 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * High, Type of Stock Large-Value Industry Emerging Market Zacks Industry Rank * 246 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,345 A 35,569 A 33,955 A 35,593 A 141,462 A ,494 A 36,910 A 39,036 A 30,867 E 141,307 E ,799 E 32,865 E 28,847 E 31,537 E 126,048 E ,113 E Earnings Per ADR Estimates (EPADR is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.60 A $0.46 A $0.23 A $0.42 A $1.71 A 2014 $0.34 A $0.36 A $0.21 A $0.34 E $1.25 E 2015 $0.44 E $0.38 E $0.30 E $0.17 E $1.29 E 2016 $1.47 E Projected EPADR Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Rio de Janeiro, Petroleo Brasileiro S.A. (PBR), or Petrobras S.A., is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company s activities include: exploration, exploitation and production of oil from reservoir wells, shale and other rocks, as well as refining, processing, trading and transportation of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities. Petrobras was founded in October 1953 to conduct the Brazilian government s hydrocarbon activities, which currently holds a 28.7% stake (and 50.3% voting share) in the company. Its American Depositary Receipts represent 20.6% of preferred shares and approximately 21.5% of common shares. The company operates in six segments: Exploration and Production, Refining, Transportation and Marketing, Distribution, Gas and Power, Biofuels and International. Exploration and Production (E&P): This segment includes the company s domestic E&P operations, mostly located in the offshore Campos Basin, which is Brazil's largest oil region and is one of the most prolific oil and gas areas in South America. As of year-end 2013, Petrobras had approximately 16.6 billion barrels of oil equivalent (BBOE) in proved reserves (as per SPE or Society of Petroleum Engineers guidelines), representing a marginal increase from the year-ago period. The company s oil and gas production in 2013 averaged 2.5 million barrels of oil equivalent per day (MMBOE/d), of which more than 91.4% came from its domestic operations. Refining, Transportation and Marketing: This segment houses the company s domestic refining, transportation and marketing assets. Petrobras owns and operates 12 refineries in Brazil with a gross aggregate capacity of 2.0 million barrels per day (MMBbls/d), accounting for about 82% of the country s total refining capacity. Petrobras also operates 3 refineries outside Brazil, with a total capacity of 1,694 thousand barrels per day (MBbls/d). Approximately 80% of the company s refining feedstock needs are met through domestic production activities, while the rest are met through imports. Petrobras is in the process of upgrading its refining assets to enable processing of its own productions, which are heavier in nature. The company owns a network of marketing centers, storage facilities, pipelines and shipping vessels to transport crude oil and refined products to the markets. Distribution: This segment is engaged in the distribution of oil products, fuel alcohol, and natural gas to retail, commercial, and industrial customers throughout Brazil. Currently, Petrobras has a sales network of more than 7,000 retail service stations in Brazil, all under the BR brand. The company s retail network accounts for approximately 20% of the total number of service stations in Brazil. Gas and Power: The Gas and Power segment is engaged in gas transmission and distribution, electric power generation using natural gas and renewable energy sources and biofuels operations in Brazil. Petrobras has a total of 7,028 megawatts (MW) of installed capacity. The company s natural gas transportation assets comprise more than 9,000 miles of gas pipelines, including the Brazilian side of the Bolivia-Brazil pipeline. Biofuels: The unit deals with renewable energy programs, including biodiesel, agricultural supplies, vegetable oil extraction and ethanol. Petrobras provides for more than 10% of Brazil s biodiesel and also acts as a market catalyst by securing and blending biodiesel supplies and providing these to smaller distributors in addition to the company s own service stations. Additionally, Petrobras is an active player in the growing ethanol industry through production, transportation, distribution, wholesale and export, and by stimulating improvements in product quality. Equity Research PBR Page 2

3 International: This segment includes all of the company s activities outside Brazil, including exploration and production, refining, distribution, and natural gas and power. Petrobras has operations in a number of different countries outside Brazil, primarily in South America, the U.S., Gulf of Mexico, and West Africa. REASONS TO BUY REASONS TO SELL Petrobras is the largest publicly-traded Latin American oil company, dominating Brazil s oil and gas sector. The company produces substantially all of Brazil s crude oil and natural gas and accounts for almost the entire refining capacity of the country. It is building the country s natural gas infrastructure and enjoys strong market share positions in the petroleum product and liquefied petroleum gas ( LPG ) marketing businesses. While the company no longer operates as a legal monopoly, the size and reach of its operations make it a quasi-monopoly in Brazil. Petrobras plans to take more selective investment decisions during the period. The company intends to lower exploration investment to bare minimum to check its liquidity issues. Petrobras expects 2015 investment to be between $31 billion and $33 billion. The company also plans asset sales worth $3 billion during 2015, another measure to tackle its financial problems. The company expects year-over-year production growth of about 4.5% in 2015, continuing the trend from the latter half of New platform additions and field start-ups should support this growth. Recently, Petrobras former CEO Maria Graças Foster and some other executives associated with the multibillion money laundering and bribery case were removed from position. This could come as a welcome change as the scarred Brazilian firm may see recovery in the hands of new management. Brazilian politics and economics and changes to the country s energy legislation may have important effects on Petrobras. Any development on this front that has a positive impact on the company s financial condition. Petrobras former director of engineering and services and 27 other company people were arrested on the back of a multibillion-dollar money laundering and bribery case. The ongoing internal investigations resulted in a delay in its financial results. However, the results did not include any picture of the scandal or estimate of its impact. The incident raised questions about the company s operational integrity and the uncertainty overhang continues to weigh on Petrobras financials. The ongoing investigation has also set the company s credit rating at a risk. With increasing debt levels and decrease in creditors amid its current uncertainty, the company may have to look towards the government for funds. This is likely to negatively reflect upon Petrobras credit metrics. Petrobras results are heavily levered to changes in the overall energy price environment, which are inherently volatile. With low crude prices, realized prices could significantly decline, thus hampering company revenues. The Brazilian government, the company s majority shareholder, has a history of political interference in Petrobras affairs. We do not expect this situation to change in the short- to medium-term. This may impact the company s performance, since interests of the government might not coincide with that of minority shareholders. Equity Research PBR Page 3

4 RECENT NEWS A considerable portion of Petrobras international operations are either denominated in dollars or are influenced by the global commodity and benchmark prices, which are quoted in dollars. As such, Petrobras shares may materially underperform our expectation in case of adverse currency fluctuations. Petrobras Down as Delayed Q3 Earnings Miss on Oil Slide On Jan 27, 2015, Petrobras released its delayed third-quarter 2014 results. The company was supposed to declare the report last November. Petrobras ongoing internal investigations related to multibillion money laundering and bribery cases prompted the postponement. The result does not include any picture of the scandal or estimate of its impact. Petrobras third-quarter profit came in at R$3,087 million, 9% lower than R$3,395 million earned in the year-earlier quarter. Earnings per ADR came in at US$0.21 (1 ADR = 2 shares) against the year-ago profit of US$0.23. The company s per ADR profits were also sharply below the Zacks Consensus Estimate of US$0.29. The deterioration can be traced back to lower crude price realization during the entire third quarter. Petrobras ADR tumbled 14% on the NYSE as the company did not provide any clear picture of the financial impact of the scandal. Petrobras net operating revenues of R$88,377 million were above the year-earlier level of R$77,700 million, owing to higher production. Segmental Performance Upstream: Petrobras total oil and gas production during the third quarter reached 2,746 thousand barrels per day (MBbl/d), up from 2,522 MBbl/d in the year-ago period. Compared with the July-September quarter of 2013, the company s domestic oil and natural gas production increased more than 9% to 2,531 MBbl/d, while international production came in at 215 MBbl/d (against 208 MBbl/d in the corresponding quarter last year). During the third quarter of 2014, the average sales price of oil in Brazil decreased 8% from the yearearlier period to US$90.73 per barrel. Average sales price of international oil was down more than 2% year over year to US$84.05 per barrel. On the other hand, average international sales price for natural gas increased 4% from the third quarter of 2013, while domestic price was up almost 6%. The fall in crude price in both domestic and international markets primarily pushed the upstream (or exploration & production) segment profit lower by 13% to R$15,372 million. Lifting cost per barrel (or cost to produce each barrel of oil) moved up almost 3% in Brazil to R$35.18 but overseas costs fell 9% to US$8.84. Downstream: During the third quarter, Petrobras downstream unit incurred net loss of R$7,957 million, narrower than the loss of R$8,501 million a year ago. Reduced input cost owing to lower crude price during the entire quarter helped the company improve its refining profit. Equity Research PBR Page 4

5 Refining costs per barrel in Brazil were down by 2% to R$7.33. Internationally, it decreased 6% to US$4.02. Petrobras imported an average of 713,000 MBbl/d of crude oil and oil products, down 14% from the prior year period. Capital Spending & Balance Sheet During the three months ended Sep 30, 2014, Petrobras capital investments and expenditures totaled R$20,129 million. At the end of the quarter, the company had cash and cash equivalents of R$62,409 million and a total debt of R$261,445 million. Net debt-to-capitalization ratio was approximately 43%. Petrobras (PBR) Locates Oil of Good Quality at Pudim Well On Jan 5, 2015, Petrobras declared the findings of good quality oil at Pudim well, located in Espirito Santo basin. The company found oil after drilling at a depth of 4,670 meters. When the company ran the initial drilling test on the offshore well last year, it reached a depth of 4,305 4,383 meters. At that time, Petrobras said that it found oil of roughly 35 API. The integrated energy player has a 65% ownership in the consortium which has drilled the well in the Espirito Santo basin. Petrobras is also the operator of the project. Petrobras Production Reaches Historical High, Stock Gains On Dec 23, 2014, Petrobras ADRs gained around 3.5% following the announcement that it has achieved historical production levels. The Brazilian state-run energy giant said that as of Dec 21 its oil and natural gas liquid (NGL) production reached 2.29 million barrels per day, breaking the previous record of 2.26 million. The company further added that it has attained a daily operated production record of 2.47 barrels per day. Contribution from nine production systems five of which came online last year and the remaining four this year led to this production growth. These include, platforms P-63 and P-53 working in Campos Basin, the Floating Production Storage and Offloading ( FPSO ) vessels Cidade de São Paulo and Cidade de Paraty in the pre-salt Santos Basin, and FPSO Cidade de Itajaí in the post-salt Santos Basin which was installed last year. Platforms P-58 and P-62 installed in 2014 and operating in Campos Basin, and FPSOs Cidade de Mangaratiba and Cidade de Ilhabela operating in the pre-salt Santos Basin were the other contributors to production. Moreover, the five wells that were installed last year had new wells connected to them this year. Petrobras also stated that its Operational Efficiency Increase Program has improved production from the Rio de Janeiro and Espírito Santo areas of the Campos Basin. Improved yield from fields at North and Northeast of Brazil, as a result of this program, has almost offset the impact of natural field declines from mature fields in the region. Petrobras added that it has achieved a record pre-salt production of 700,000 barrels per day from the fields operated by it. Petrobras holds about 74% stake in the fields. The record level with only 34 production wells indicates the high productivity of the region. Of these, 16 wells, located in the Santos Basin, contributed over 60% to the total pre-salt production while 18 wells located in the Campos Basin accounted for the rest. Equity Research PBR Page 5

6 Petrobras Rises on Natural Gas Findings at Tayrona Block On Dec 2, 2014, Petrobras declared the findings of natural gas at Orca-1 exploratory well located at Tayrona Block, offshore Colombia. This signifies the first discovery in the exploratory history of the Colombian Caribbean deep waters. Post announcement, Petrobras ADR rose 3% on the NYSE to reach $9.27. Petrobras completed the drilling activities at the well in the Tayrona Block this September and reached a depth of meters. The company confirmed accumulation of natural gas after reaching roughly meters in the Orca-1 well. Petrobras will now work on the evaluation activities of the well s discovery. Petrobras operates the well with a 40% stake. Bogotá, Colombia-based integrated energy player Ecopetrol SA owns 30% while Repsol S.A. holds the remainder. VALUATION Petrobras recent issue of money laundering and bribery case, in which the company s former director of engineering and services along with 27 people were arrested, raises question on its credibility. The ongoing investigation has also put the company s credit metrics at risk. However, Petrobras recently announced several measures like asset sales and lowering of investments to tackle the financial troubles. Moreover, a change in management could bring good tidings for the company. These factors are reflected in our new Neutral recommendation on Petrobras ADRs. Petrobras current trailing 12-month earnings multiple is 4.9, compared with the 5.7 industry average and 18.9 for the S&P 500. Over the last five years, Petrobras ADRs have traded in a range of 4.5x to 14.6x trailing 12-month earnings. Our $6.75 price objective reflects a 2015 of 5.2x. Equity Research PBR Page 6

7 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Petroleo Brasileiro S.A. ADR C (PBR) N/A Industry Average S&P Lukoil Holding ADR (LUKOY) China Petroleum & Chemical Corp. (SNP) Petroleo Brasileiro ADR P (PBR.A) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Petroleo Brasileiro S.A. ADR C (PBR) Industry Average S&P Equity Research PBR Page 7

8 Earnings Surprise and Estimate Revision History Equity Research PBR Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of PBR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 6.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Editor QCA Lead Analyst Reasons for Update Namrata Das Priyanka Bhattacharyya Nilanjan Choudhury Nilanjan Choudhury Earnings Update Equity Research PBR Page 9