1. Company Overview
Petrobras, officially known as Petroleo Brasileiro S.A. (PBR.A), is a Brazilian corporation headquartered in Rio de Janeiro and founded in 1953. The Government of Brazil remains a significant shareholder. Specializing in gas and oil exploration, production, and distribution, Petrobras prioritizes low-cost operations and low carbon emissions, making it one of Brazil’s most sustainable companies. According to its latest Production and Sales Report for Q4 2023, the company aims to neutralize emissions by 2050. Given its crucial role in Brazilian politics and economics, Petrobras is once again under the market’s spotlight.
2. Recent Developments
Petrobras has experienced significant leadership changes, which have affected its stock performance. On May 24th, the stock price was USD 14.82, a decline from USD 16.81 the previous month. This drop was primarily due to Brazilian President Lula’s announcement of another CEO change. Magda Chambriard, an internal executive with over 40 years at Petrobras, has taken over as CEO, replacing Jean Paul Prates. This leadership instability has caused uncertainty among investors, particularly regarding the stock’s performance and potential changes in dividend policy.
3. Historical Scandals
Petrobras is not only known for its significant growth and dividend generosity but also for its involvement in one of Brazil’s biggest political scandals. The “Car Wash” operation (Lava Jato) started in 2014, leading to the indictment of hundreds of politicians and high-level entrepreneurs who allegedly accepted payments in exchange for contracts with Petrobras. This scandal revealed the involvement of Petrobras executives in overpaying contracts with construction companies, with a portion of the funds being diverted to secret accounts for paying politicians. The scandal highlighted deep-rooted issues within Petrobras and led to significant reforms aimed at improving governance and transparency. These reforms have been crucial in restoring investor confidence and ensuring that Petrobras can operate effectively in a challenging environment. The company has since made strides in addressing these issues, focusing on ethical practices and compliance to prevent similar incidents in the future.
4. Production and Expansion
Petrobras’s production and expansion activities have shown robust growth. The company closed Q4 2023 with an average production of 2.93 million barrels of oil equivalent per day, representing a 109% growth compared to the same period in 2022. Oil production reached 2.36 million barrels per day, a significant 118% increase compared to Q4 2022. This growth reflects Petrobras’s ability to scale its operations and meet the increasing demand for oil and gas.
An exciting development on the horizon is the potential recovery of the Landulpho Alves Mataripe Refinery (RLAM) in Bahia. This project, in partnership with the UAE-based Mubadala fund, could be a significant growth catalyst for Petrobras. The refinery was initially sold during Jair Bolsonaro’s presidency as part of a divestment strategy. However, under President Lula’s administration, there are plans to buy back the project and boost fuel production. This initiative underscores Petrobras’s commitment to expanding its operational capacity and enhancing its market position.
5. Financial Performance and Technical analysis
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Petrobras’s revenues and earnings have been on an upward trajectory over the past decade. The growth in oil demand from emerging markets such as Brazil, China, India, and Indonesia ensures that the total addressable market for Petrobras continues to expand. The company’s impressive EBITDA margin of 51.07% as of December 31, 2023, demonstrates its profitability and operational efficiency, which reassures shareholders about the sustainability of its generous dividend yield.
The return on assets (ROA) and return on equity (ROE) are critical indicators of a company’s financial health. Petrobras’s ROA stands at 13%, meaning the company generates $1.13 for every dollar invested in assets. Its ROE is even more impressive at 34%, indicating that for every dollar invested in equity, the company generates $1.34. These figures suggest that Petrobras’s management is effectively using its assets and equity to generate profits, reflecting efficient management practices.
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From a valuation perspective, Petrobras remains attractively priced. Despite the uptrend since March 2020, the stock is still significantly undervalued relative to its pre-COVID-19 levels. The price-to-earnings (PE) ratio, excluding non-recurring items, values the stock at 4.22x, compared to 10.72x in 2019. This discrepancy indicates that the stock has not yet fully recovered to its pre-pandemic valuation, offering potential upside for investors as it is trading at a discount compared to its pre-COVID price, which was 15.64 USD per share on January 6, 2020. Currently, it is trading at 14.60 USD per share. When comparing PE ratio with its competitors, it clearly states that the company is undervalued and has a significant growth potential in the next years.
This shows that even though the company’s financial indicators (as stated above) are improving, the price, which should be significantly higher, is not growing as per investors’ expectations.
6. Dividends
One of the key attractions of Petrobras is its dividend policy. On May 22nd, the Brazilian government announced that Petrobras is expected to pay out all extraordinary dividends, raising the estimated dividend revenue by approximately USD 2.78 billion. The current dividend yield stands at around 16.23%, with a growth of 212.80% over the past three years. The company has maintained stable quarterly dividend payments over the last five years, further enhancing its appeal to income-focused investors. We can observe that the dividend payout ratio could be improved and made less volatile, as the year-to-year changes are significant. The most recent announcement of a dividend payment of $0.42 per share, with an ex-dividend date of April 26, 2024, has investors eagerly anticipating this upcoming distribution.
When analysing the payout ratios and dividend yields of recent years, the numbers may suggest that the dividends might not be sustainable. However, the growth rate over the past three years indicates that the company is growing steadily and ranks in the top tier for sustainable growth compared to the industry average. The company’s revenue increases by approximately 21.30% per year on average, significantly outperforming about 60.14% of global competitors. The company’s strong financial performance and profitability have enabled it to consistently reward shareholders with substantial dividends. This generous dividend policy has been a significant factor in attracting and retaining investors, providing a steady stream of income and reinforcing confidence in the company’s financial health.
8. Environmental, Social, and Governance (ESG) Initiatives
In recent years, Petrobras has made significant investments in sustainability initiatives. The company is committed to reducing its carbon footprint and plans to achieve carbon neutrality by 2050. This commitment includes investing in renewable energy sources, petrochemicals, biofuels, and refining processes that reduce emissions. These initiatives are part of Petrobras’s broader strategy to align with global sustainability trends and meet the growing demand for cleaner energy solutions.
Petrobras’s focus on sustainability is not only beneficial for the environment but also enhances its appeal to socially responsible investors. By prioritizing low-carbon operations and investing in renewable energy, Petrobras is positioning itself as a leader in the transition to a more sustainable energy future.
9. Risk Factors
Despite its strong financial performance and growth prospects, Petrobras faces several risks and challenges. One of the primary concerns is the potential for further sell-offs if oil prices continue to decline from their 2022 peak. A sustained drop in oil prices could slow financial growth, particularly if large parts of the world enter recessionary environments due to tight monetary policies, which could dampen demand for energy resources.
Another significant risk is the inherent political instability in Brazil. The potential for changes in government could impact Petrobras’s management and operations. If a new president is elected, there is a risk that supportive policies implemented by President Lula could be reversed, leading to further instability. However, this risk is currently mitigated by Lula’s recent election victory and Petrobras’s extensive experience in navigating Brazil’s complex political landscape.
Conclusion
Petrobras (PBR.A) is a prominent player in the energy sector, marked by significant growth, robust financial performance, and generous dividends. Despite recent leadership changes and political challenges, the company’s long-term prospects remain strong. Petrobras continues to be an attractive investment for those looking to gain exposure to South America and the energy sector. Its stock, with an appealing dividend yield and consistent corporate developments, is a valuable addition to any balanced or energy-oriented portfolio.
The company’s commitment to sustainability, strong financial metrics, and strategic initiatives position it well for future growth. Investors should consider Petrobras as a key component of their investment strategy, particularly those focused on long-term growth and income. With its extensive experience and strategic vision, Petrobras is poised to navigate the challenges ahead and continue delivering value to its shareholders.
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