On Monday, CFRA upgraded its rating on Petrobras (NYSE:PBR) from Sell to Hold, maintaining a price target of $13.00. The decision was based on the stock's valuation after a 15% decline since the beginning of the year. The 12-month target price is set at a 5.9x multiple of the company's projected 2025 EBITDA, which represents a slight discount compared to its U.S. supermajor oil peers. This valuation takes into account concerns over crude oil pricing in 2025.
The firm has revised its earnings per American Depositary Share (ADS) estimates for Petrobras, decreasing the 2024 forecast by BRL0.12 to BRL17.91, while increasing the 2025 estimate by BRL0.35 to BRL16.78. The third-quarter earnings per ADS of BRL5.12 exceeded the consensus estimate by BRL0.86, outperforming last year's BRL4.18. The improvement in year-over-year earnings is partially attributed to better results from foreign exchange gains and losses.
Despite a 15% year-over-year decrease in EBITDA, capital expenditures (capex) rose by 31% to $3.8 billion. This increase was largely due to front-loaded spending in the third quarter. Petrobras has not made any changes to its capital expenditure guidance for the calendar year 2024. The majority of the Q3 capex was invested in pre-salt offshore plays in Brazil, which CFRA considers a sensible strategy.
The CFRA's analysis assumes an exchange rate of 5.55 Brazilian reals to one U.S. dollar. Additionally, the firm estimates that Petrobras' yield stands at 17%. Despite the upgrade, the analyst expressed a lack of enthusiasm for Petrobras' investments in non-core activities.
In other recent news, Petrobras has been making significant strides in various areas. The Brazilian oil giant reported a robust financial performance for Q2 2024, with an EBITDA of $12 billion and an operating cash flow of $10 billion. The company also managed to reduce its financial debt by $2.5 billion. These developments come alongside Petrobras' plans to increase investments to between $13.5 billion and $14.5 billion for 2024.
Morgan Stanley (NYSE:MS) and JPMorgan have both upgraded Petrobras' stock rating to overweight, citing the company's ability to manage its cash flow effectively and its potential for significant total return. The financial institutions have raised their price targets for the company to $20 and $19, respectively.
Petrobras Global Finance B.V., a subsidiary of Petrobras, has also launched a new series of U.S. dollar-denominated global notes and cash tender offers. The proceeds from these transactions will primarily finance the repurchase of tender notes. This move aligns with Petrobras' debt management policy, aiming to maintain a healthy debt level for a company of its scale and industry sector.
In terms of strategic developments, Petrobras has discovered natural gas off the coast of Colombia and is preparing for production to start at the FPSO Maria Quitéria and the Rota 3 gas pipeline. The company is considering partnerships for the potential acquisition of the RLAM refinery and is open to potential mergers and acquisitions that align with its strategic goals.
InvestingPro Insights
Petrobras's financial metrics and market performance offer additional context to CFRA's recent upgrade. According to InvestingPro data, the company's P/E ratio stands at 5.52, indicating that the stock may be undervalued relative to its earnings. This aligns with CFRA's decision to upgrade the stock based on its current valuation after the recent price decline.
InvestingPro Tips highlight that Petrobras "pays a significant dividend to shareholders" and "has maintained dividend payments for 7 consecutive years." This is further supported by the impressive dividend yield of 16.8%, which closely matches CFRA's estimate of 17%. Such a high yield could be attractive to income-focused investors, especially considering the company's consistent dividend history.
Another relevant InvestingPro Tip notes that Petrobras is a "prominent player in the Oil, Gas & Consumable Fuels industry." This status underscores the importance of the company's focus on pre-salt offshore plays in Brazil, which CFRA deemed a sensible strategy.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide further insights into Petrobras's financial health and market position.
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