Petrobras Enters New Era After Scandal

Petrobras Enters New Era After Scandal

Price $10.00                      Recent Purchase                       November 10, 2021

  • 8.8% dividend yield.
  • Offshore pre-salt is one of the greatest oil fields on Earth.
  • Breaking ESG, revenue, and debt reduction targets.
  • 85% market share in Brazil, significant Chinese and European export market.
  • First pick on government-owned oil deposits, with favorable contracts.

Investment Thesis

Petroleo Brasileiro, commonly called Petrobras (PBR), is a Brazilian state-controlled oil company and is one of the largest publicly-traded companies in Latin America. Since it began developing the large pre-salt fields off the coast of Brazil, Petrobras has become one of the top producers of oil in the world.

Because of its block-busting dividend and compelling valuation, we believe it is an excellent choice for minor capital appreciation and dividend yield.

Operations

Petrobras operates 3 types of oil drilling operations, Onshore and shallow water operations, deepwater, and pre-salt deposits. Shallow water, onshore, and deepwater are all very common globally. However, Petrobras’s operations unique is the addition of novel pre-salt fields, high grade but difficult to extract oil deep under layers of salt at the seafloor. Although, Petrobras first overcame the technical hurdle pre-salt deposits posed in 2009, pre-salt deposits have far exceeded the industry daily average for output. Thus, it has become an increasingly large percentage of Petrobras’s drilling, making up 71% of total production.

The cost of extracting these varies, with pre-salt deposits near continental shelves costing $2.5/boe, deepwater costing $10.7/boe, and onshore and shallow water operations making up $14.3/boe.

PBR has seen a higher volume of sales in the domestic Brazilian market, up 11%. Petrobras also has a significant 85% market share in consumer fuels in Brazil, selling some 1,950,000boe per day in Brazil.

Petrobras exports between 600-750,000boe per day of raw crude oil, and between 200-250,000boe per day of oil products at some refining stage.

Búzios is the largest and highest quality oil producing field, a pre-salt-deepwater deposit. 

ESG and Expansion

The Capex budget for 2021-2025 is projected at $55 billion, of which 84% will go toward exploration and production of oil and gas. Much of this will go toward the new fleet of Floating Production Storage and Offloading ships (FSPOs) – allowing increased efficiency, significantly lower emissions, and substantially lower startup costs for extracting oil from new fields.

$170 million a year will be allocated toward forwarding ESG goals, including safety initiatives, biofuels, carbon capture technologies, and offshore solar and wind farms. PBR has an emissions reduction target of 25% by 2030, measured from 2015. They have already smashed this goal in 2020, managing a 28% decrease in emissions since 2015 and 42% since 2009.

Risk

The primary risks facing Petrobras are political regarding the controlling ownership by the Brazilian government and the possible corruption that comes with this governmental control. In addition, the standard oil and gas firm risks market fluctuations in the price of inputs or outputs, adverse regulatory changes, catastrophic accidents, operational failures, environmental damage, and long-term impact on demand from decarbonization.

There are additional legal risks. Under Brazilian law, all crude and natural gas produced from below a certain soil level in Brazil is legally the property of the Brazilian government. Thus, while the controlling share of Petrobras is the Brazilian government, the government still reserves the right to restrict the exploitation of certain deposits. Should Petrobras be privatized, it could see more difficulty in this process.

From 2008 to 2018, Petrobras was involved in a wide-ranging corruption scheme in Brazil. Conservative estimates put $2.1 billion spent on bribes, and $17 billion of their balance sheet was found to be grafted money or improperly priced assets. This ended with 174 Brazilian government officials and Petrobras executives going to jail, including former Brazilian President Luiz Lula da Silva and Petrobras’s then CEO. While this was a watershed moment for them, several burdens still plague Petrobras – and is one of the primary reasons they are undergoing so many divestitures. Should continuing terms not end amicably for them or breach remaining contracts (including non-prosecution agreements with the SEC and DoJ), it could spell disaster for the firm.

Additionally, Bolsonaro should be considered an unstable figure in the region, having flip-flopped on the issue of Petrobras throughout his campaign and presidency, most recently twice in early November where the government is again considering privatization, to combat rising fuel prices, and then a few days later saying that the company makes too much money. Instead, they should use the money they are repaying shareholders to lower consumer fuel prices.

Metrics

Petrobras has a debt target of $60 billion in 2022 but managed to reduce their debt down to $59.6 billion already. This brings their debt/EBITDA ratio down to 1.17x, bringing it in line with other major oil and gas firms.

PBR had free cash flow of $21 Billion for 12 months just ended. With new approval of dividend-paying out 8.8% per share (17% increase), and share repurchases, PBR estimates $12 billion will be returned to shareholders in 2021.

Sector breakdown is as follows:

Sector

EBITDA increase YoY

Explanation

Exploration and Production

+73.6%

Crude oil appreciation and cost reduction

Refining, Transport, and Commercialization

+47.2%

Higher expenses offset by higher demand

Gas and Power

-53.6%

Higher input costs of LNGs

Petroleo Brasileiro (PBR)

E2021

E2022

E2023

Price-to-Sales

0.8

0.7

0.7

Price-to-Earnings

4.0

3.9

3.8

EV/EBITDA

2.7

2.6

2.4

Estimated Next 12 Months

Dividend Yield

Price-to-Sales

Price-to-Earnings

Petroleo Brasileiro (PBR)

8.8%

0.7

3.8

Eni (ENI)

7.0%

0.6

9.3

Exxon Mobil (XOM)

5.4%

0.9

11.1

BP (BP)

4.8%

0.4

6.6

Chevron (CVX)

4.8%

1.3

12.5

Suncor Energy (SU)

4.8%

1.1

8.4

Royal Dutch Shell (RDS.B)

3.1%

0.5

8.9

Conocophillips (COP)

2.4%

2.0

10.0

Marathon Oil (MRO)

1.3%

2.4

9.2

Occidental Petroleum (OXY)

0.1%

1.2

11.1