Petrobras Impresses, but Shares Overpriced
The progress that the new management team has delivered as well as future improvement is largely reflected in the current stock price.
Petroleo (PBR) delivered solid fourth-quarter results, demonstrating that it's on track to deliver the improvements promised in its latest five-year plan. For the quarter, adjusted EBITDA improved to BRL 24.8 billion from BRL 18.9 billion the year before. Petrobras registered improvement across all segments with the exception of refining. The exploration and production segment led the improvement with adjusted EBITDA increasing to BRL 17.7 billion from BRL 11.6 billion last year as a result of a 3.2% increase in production, a reduction in lifting costs, and higher realized prices. Refining adjusted EBITDA slipped to BRL 9.9 billion from BRL 11.5 billion a year ago.
Importantly, the improved performance led to net debt/EBITDA falling to 3.5 times from 5.1 times a year ago and demonstrated that Petrobras is on track to achieve its year-end 2018 goal of 2.5 times. We think this target is achievable, assuming that oil prices hold at current levels or move higher. That said, our forecast is for oil price weakness in 2018 ($45 a barrel average), which would imply that Petrobras will fall short of its goal, although an eventual recovery in prices would mean the target is ultimately achievable, if later than expected. Net debt/capital fell to 55% from 60% at the end of last year as the real's strength reduced the debt balance. While free cash flow slipped from the third quarter, Petrobras still delivered BRL 12.0 billion during the fourth quarter and BRL 41.6 billion for the full year, a marked improvement over 2015, on reduced spending levels. We expect continued delivery of free cash flow will allow for debt reduction in the coming years. While we remain impressed by the ongoing turnaround that the company and new management team have delivered, we think this progress as well as future improvement is largely reflected in the stock price. Our fair value estimate and no-moat rating are unchanged.
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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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