Petrobras: Board Recommendation for Dividend Reserve Raises Warning Flag

Petrobras benefited from higher oil prices during the quarter, while refining results remained strong despite concerns on product pricing. Strong free cash flow and lower debt levels suggest the firm remains on the right track, for now. A potential change to the dividend policy, however, demonstrated the political risk that could quickly accelerate with the new administration. The board approved a dividend of BRL 2.75 (about $1.06 per ADR at current exchange rates). Although slightly lower than the BRL 3.35 of the third quarter, it kept with the existing policy to payout 60% of free cash flow plus an extraordinary dividend. However, the board also recommended retaining the BRL 0.50 extraordinary dividend this quarter as a reserve. While subject to shareholder approval, it’s all but a done deal given the government’s controlling interest. As new the new Lula administration spoke of retaining more earnings to invest in renewables and other projects, this initial reserve proposal serves as a warning to investors. That said, Petrobras’ lagging share price and very high yield suggest investors are already prepared for a cessation to the big dividends paid in 2022 that equated to about half the current share price. We think this is likely the correct expectation. Our fair value estimate and moat rating are unchanged, implying shares are slightly undervalued, but investors should take caution that bigger changes could be underway.