Petrobras (NYSE:PBR) is a state-owned Brazilian multinational company with a market capitalization of more than $60 billion. Nowhere is this connection more evident than the CEO planning to leave from the most recent presidential election. Lula’s first actions as president were to end the privatization of Petrobras.
The stock has been volatile, dropping 35% over the last few months. At the center is the question of what is Petrobras’ long-term role in the Brazilian government. However, despite this volatility, we still see long-term opportunity.
Petrobras and Brazil
Petrobras continues to have the substantial risk of the current uncertainty in Brazil.
The company is one of the largest sources of wealth for the government both through dividends and tax revenues. The country earns $300 billion in annual tax revenue and Petrobras has the ability to send the government 10+% of that annualized, not counting additional tax revenue from employment, growth, etc.
More so the company has a strong integrated business that supplies the local market, meaning that it has a hefty say over local fuel prices. That combination means that the company will continuously be affected by recent political administrations. Lula’s last time in office was marked by corruption for the company and substantial risks.
As long as the country continues to view the company as a direct source of revenue, this will continue to be one of the company’s largest and most volatile risks.
Petrobras Financial Management
Petrobras has done an impressive job of managing its finances that were once in a difficult position.
Petrobras has managed to substantially reduce its debt load and postpone its liabilities. The company’s balance sheet from a liability perspective is much cleaner than it was a few years ago, despite COVID-19, freeing up substantial cash for shareholder returns and reinvest in the company’s business. The company has cut its interest expenses by almost 70% in 5-years.
The company has announced a 50% dividend yield for 2022 and continues to be a major tax payer to the state. The company’s cash has hit its reference level as well. As a result of these balance sheet improvements we expect strong future shareholder returns.
Petrobras Financial Planning
The company’s financial planning will enable substantial shareholder returns over the upcoming 5-year period.
The amount that the company expects to return to society is enormous with taxes and the government’s take consuming roughly 52% of its entire cash flow. That’s massive as well for a company with a market capitalization of less than $70 billion. The company expects to use roughly $67 billion (just under $15 billion/year on capex) along with a similar amount of dividends.
Counting potential extraordinary dividends, the company expects to be able to provide annualized dividends at a staggering 24% for the upcoming 5-year period. That highlights the strength of the company’s balance sheet and its ability to drive shareholder returns.
Petrobras Portfolio Improvements
At the same time, the company expects continued growth that could result in the company being better positioned for future cash flow in 2027 than it is now.
The company’s goal is for lifting costs at $5.5/barrel with the total cost per barrel produced at $33/barrel (primarily due to government taxes/expenses). Even in the current environment, where Brent crude has dropped towards $80/barrel, that’s still an incredibly strong profit margin on that that’ll support shareholder returns.
The company expects to ramp up its continued focus on low-cost pre-salt production, with a lifting cost of just over $4/barrel. At the same time the company expects to grow total production from 2.6 to 3.1 million barrels/day, with commercial production rising at a faster % from 2.3 to 2.8 million barrels/day.
Petrobras has an incredibly low valuation for an oil company of its size with a market capitalization of less than $70 billion.
The company is focused on shifting its image and driving substantial shareholder returns. It’s cleaned up its balance sheet substantially and as a result, it’s able to invest in both production growth (22% expected over the next 5-years) while reducing costs and providing more substantial direct shareholder returns.
The company expects to be able to provide 20+% annualized dividends over the next 5-years helping both its largest shareholder (the Brazilian government) and all other shareholders. As long as the Brazilian government realizes that overall success of the company is good for them too, we expect the company to be a valuable investment.
The largest risks to our thesis are two-fold. The first is the already discussed risk of the company’s ties to the Brazilian government and its view as a source of wealth creation for solely the Brazilian people. The company expects to return 52% of its cash flow to the state, but there’s no guarantee that that number can’t increase further.
The second is the standard risk for all petroleum companies, crude oil prices. The company has guaranteed mid-to-high single digit returns from dividends at $40/barrel Brent, but below that returns drop substantially. Of course on the flip side the company is very profitable at current levels of $85/barrel Brent. There’s no guarantee prices remain higher though.
Petrobras has a unique portfolio of assets that are incredibly profitable. The company’s focus on pre-salt assets has panned out incredibly well for the company with their low lifting costs of just over $4/barrel and low overall costs. The Santos Basin is expected to make up 50% of the company’s capex for the next 5-year period.
The company’s production growth and strong cash flow are expected to pan out with extraordinary dividends. That’s especially true given the company’s lower valuation. The company expects to be able to pay out 24% in annualized dividends for the next 5-years, showing its financial strength, and supporting substantial shareholder returns.