Company Reports

With its latest five-year plan, Petrobras meaningfully increased spending levels as it incorporates investments for the energy transition. While the latest plan is by no means a return to the profligate spending of a decade ago that first placed Petrobras in jeopardy, it is—along with a reduction in the payout ratio—a departure from the capital discipline of the last few years that resulted in a healthier balance sheet and large shareholder payouts.

On Friday, March 8, Petrobras shares fell as the board-approved fourth-quarter dividend of BRL 1.10 ($0.44 per ADR at current exchange rates) was a decrease from third-quarter levels and likely less than what the market was expecting. The company also repurchased BRL 2.7 billion worth of shares, returning in total BRL 17.5 billion to shareholders in the fourth quarter. Petrobras did not pay an extraordinary dividend for the second straight quarter, although it met its policy by returning 45% of free cash flow, which remains highly competitive with integrated oil peers. The market shouldn’t be all that surprised, though. As we’ve previously noted, this is the beginning of a shift from a high shareholder distribution during 2022 in favor of larger future investments, including low carbon. We previously expressed our concerns when the payout reduction and latest investment plan were first announced. Our $15.30 fair value estimate and no-moat rating for Petrobras are unchanged, as shares were overvalued before March 8, in our view.

With its latest 5-year plan, Petrobras meaningfully increased spending levels as it incorporates investments for the energy transition. While the latest plan is by no means a return to the profligate spending of a decade ago that first placed Petrobras in jeopardy, it is—along with a reduction in the payout ratio—a departure from the capital discipline of the last few years that resulted in a healthier balance sheet and large shareholder payouts.

Petrobras' reported third-quarter adjusted recurring EBITDA fell to BRL 66.9 billion from BRL 92.7 billion a year ago on lower oil prices, which were partially offset by an increase in volumes.

Petrobras reported second-quarter adjusted recurring EBITDA fell to BRL 58.2 billion from BRL 99.3 billion a year before largely on lower oil prices. However, the main story was the new remuneration policy.

Petrobras reported first-quarter adjusted reoccurring EBITDA fell to BRL 74.5 billion from BRL 78.2 billion a year before largely on lower oil prices, beating market expectations.

Despite turnover in top management, Petrobras appears to be sticking to the same key elements of its investor friendly strategic plans—notably reduced leverage, disciplined capital spending, and modest production growth—that have righted the ship in recent years. The strategy is literally paying dividends as Petrobras has increased payouts with stronger cash flow from higher oil price thanks to its variable distribution plan, instead of plowing it back into value-destructive investment.

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.

Petrobras announced its 2023-27 strategic plan that included an increase in spending to prepandemic levels but largely held the line on the capital discipline that has been the centerpiece of its recent turnaround. However, the ultimate implementation of the plan for its full duration remains in question given the recent election of Luiz Inácio Lula da Silva, who has signaled he’d like to make changes to Petrobras' capital plans and operations—to what extent, however, remains unknown. Until that outcome is known, we will view any management plans skeptically despite thinking them sound. Meanwhile, investors might continue to steer clear of Petrobras despite its financial improvement and large payouts. Our fair value estimate and moat rating, which already incorporated higher spending and lower downstream profitability, remain unchanged.

Despite turnover in top management, Petrobras appears to be sticking to the same key elements of its strategic plans—notably reduced leverage, disciplined capital spending, and modest production growth—that have righted the ship in recent years. The strategy is literally paying dividends as Petrobras is increasing payouts given the stronger cash flow resulting from higher oil price instead of plowing it back into value-destructive investment.

Petrobras reported adjusted reoccurring EBITDA of BRL 92.3 billion compared with BRL 63.9 the year prior. Higher oil prices were the primary factor lifting exploration and production’s adjusted EBITDA to BRL 73.2 billion from BRL 54.5 billion a year ago. Total production volumes fell to 2,644 mboe/d from 2,830 mboe/d a year earlier on reduced working interest in the Atapu and Sepia fields and the decommissioning of the FPSO Capixaba facility.

Petrobras reported adjusted reoccurring EBITDA of BRL 99.3 billion compared with BRL 60.0 billion a year before. Higher oil prices were the primary factor lifting exploration and production's adjusted EBITDA to BRL 78.5 billion from BRL 51.2 billion a year ago. Total production volumes fell to 2,653 mboe/d from 2,796 mboe/d a year earlier, on higher maintenance and the start of a production sharing agreement for Atapu and Sepia fields as low-cost presalt volumes reached 73% of total volumes.

Petrobras announced it received a letter from the Ministry of Mines and Energy requesting an extraordinary general meeting to replace CEO Jose Mauro Ferreira Coelho, who was just elected in April. He is to be replaced by Caio Mario Paes de Andrade, who currently is special secretary for debureaucratization and has previous experience in information technology, real estate, and agribusiness as an entrepreneur.

Despite turnover in top management, Petrobras appears to be sticking to the same key elements of its strategic plans—notably reduced leverage, disciplined capital spending, and modest production growth—that have righted the ship in recent years. The strategy is literally paying dividends as Petrobras is increasing payouts given the stronger cash flow resulting from higher oil price instead of plowing it back into value-destructive investment.

Petrobras reported adjusted reoccurring EBITDA of BRL 78.2 billion compared with BRL 47.7 billion a year before. Higher oil prices were the primary factor lifting exploration and production adjusted EBITDA to BRL 73.0 billion from BRL 44.2 billion a year ago. Total production volumes rose to 2,796 thousand barrels of oil equivalent per day from 2,765 mboe/d a year earlier, as low-cost presalt volumes reached 72% of total volumes.

Petrobras reported adjusted reccurring EBITDA of BRL 62.5 billion compared with BRL 35.1 billion a year before. Higher oil prices were the primary factor lifting E&P adjusted EBITDA to BRL 61.3 billion from BRL 29.4 billion a year ago. Total production volumes rose to 2,704 mboed from 2,682 mboed a year earlier, as low-cost pre-salt volumes reached 71% of total volumes. Full-year production in 2021 met management’s full-year production target of 2.72 mmboed despite falling to 2,774 mboed in 2021 from 2,836 mboed the year before. As Petrobras has had difficulty in the past delivering on production targets, it’s a positive sign.

Petrobras' latest five-year strategic plan calls for greater spending and an increased production outlook compared with its previous plan as it finds itself in a stronger financial position and holds a more optimistic oil price outlook than it did a year ago. Between 2022 and 2026, Petrobras plans to spend $68 billion compared with $55 billion spending in last year’s five-year plan, but with 84% still marked for the exploration and production. or E&P, segment. The increase in spending is accompanied by an increase in expected cash flow during the period as management increased their expectations for oil prices from $50/bbl flat to $72/bbl in 2022 and fading toward $55/bbl in the long term. Meanwhile, Petrobras' leverage is much reduced after achieving its $60 billion gross debt target this year, a year ahead of schedule.

Petrobras’ once lofty production targets, having already been steadily reigned in, are officially out the window with the most recent strategic plan that calls for no net growth through 2025. The lack of production growth along with another reduction in capital spending plans means Petrobras is responding to the same market forces and investor concerns as its integrated peers and turning its focus on capital discipline.

Petrobras reported adjusted reoccurring EBITDA of BRL 63.9 billion compared with BRL 37.3 billion a year before. Higher oil prices were the primary factor lifting E&P-adjusted EBITDA to BRL 54.5 billion from BRL 32.3 billion a year ago. Total production volumes fell to 2,830/mboed from 2,952/mboed a year earlier, though low-cost pre-salt volumes edged higher to reach 71% of total volumes, a 4% increase compared with the year before. Full-year production guidance is maintained at 2.72/mmboed.

With a strong second quarter marked by higher earnings, stronger free cash and further debt reduction, Petrobras announced a surprisingly high dividend payout. For 2021, it plans to pay out $6 billion, nearly three time the average of the previous three years, in two installments, implying a yield of over 8% for ADRs. The final value to ADR holders will depend on exchange rates at the time of the payment, but at the current level the yield represents one of the highest in the sector. Although it is variable and dependent on future market conditions, it does signal, along with improved profitability and leverage metrics, that Petrobras is making continued progress on its debt reduction, divestment and focused investment plans. Our fair value estimate and moat rating are unchanged.