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Why You Should Be Long Petrobras Stock


J B, Financial Advisor

Top Algo- Automated Trading Strategies Specialty: WTI Crude Oil FULL BIO


Petrobras has started making progress as far as improving the balance sheet is concerned by way of asset sales and lower capital expenses, which is good news.

Petrobras generated FCF of $3.07 billion last quarter, four times higher than its FCF in 1Q 2016, a trend that will continue as it reduces its expenses.

The loan received by Petrobras from China State Development Bank will enable it to meet near-term maturities and also allow it to invest in new projects going forward.

Petrobras has been able to enhance production and reduce costs at the same time as it is focusing on high-growth areas.

Petrobras has reduced its net debt-to-EBITDA impressively and investors can expect further declines as the company plans to sell off $15 billion of assets this year for debt reduction.

Petrleo Brasileiro- Petrobras (NYSE:PBR) has been making steady and substantial progress on the stock market. In fact, the stock is up roughly 125% year to date. In my view, Petrobras has more upside potential going forward given the recent approval of the Senate to sell off its non-core assets and the approval of a $10 billion credit line from China State Development Bank.

These moves, along with its cost reduction initiatives, should enable Petrobras to take advantage of an improving oil price environment. Let's see how.

Focus on reducing the leverage

Over the past couple of years, Petrobras has found it quite difficult to adjust to the new oil price environment due to political interference and corruption scandals. As a result, the company wasn't able to lower its debt load. As of June 30, 2016, its total debt came in at $123 billion with a net debt of $103 billion. Although these numbers are slightly lower than December 2015 levels, they remain high nevertheless. Additionally, Petrobras has to meet debt maturities of $68.7 billion by 2020.

However, the recent approval of the Senate to divest Petrobras' non-core assets will enable the company to reduce its net debt going forward. In fact, the company has made its first move this year to sell off its entire stack in Argentina to Pampa Energia SA for $892 million. Also, Petrobras will be selling its investment in Chile for a total of $490 million.

The combined proceeds from the sale of these assets are approximately $1.4 billion, which Petrobras plans to use to pay off its net debt maturing in the near term. Although it is a small portion of its asset sale target of $15 billion this year, it is nevertheless a start. In fact, Petrobras intends to expand its asset sales over the next couple of years with a plan to sell approximately $19.5 billion through its divestment program in 2017-2018.

This asset sale program will not only enable Petrobras to pay down its massive debt, but also allow it to develop its offshore oil fields in Brazil. The chart below illustrates its efforts of lowering its indebtedness so far this year.

Source: Petrobras

Additionally, Petrobras has slashed its capital expenditure in order to preserve liquidity. For instance, its capital expenditure for the first half of 2016 came in at $26.1 billion, representing a drop of 25% from the capital expenditure of $34.8 billion in the same period last year. In fact, its second quarter capital expenditure was reduced by 25% as compared to the first quarter of 2016.

In addition, Petrobras plans to lower its capital expenditure to $19.2 billion, which is significantly lower than its capital costs in 2016. What's more, its capital expenditure is expected to come in at $74.1 billion for 2017-2021, which is 25% lower than its projected capital expenditure of $98.4 billion for 2015 to 2019.

Source: Petrobras

Thus, such efforts to lower its capital expenditure should allow Petrobras to improve the condition of its balance sheet going forward. The good part is that on account of such initiatives, Petrobras managed to improve its adjusted EBITDA by 7% to $5.7 billion in the second quarter of 2016. What's more, last quarter, Petrobras generated positive free cash flow of $3.07 billion, approximately four times higher than its free cash flow in the first quarter of 2016.

Along with these recent developments, Petrobras has received another shot in the arm by landing $10 billion in loans from China Development Bank Corp. This credit facility will enable Petrobras to repay its near-term maturities. Also, this facility should permit Petrobras to invest in high growth opportunities in the next five years as outlined below:

Source: Petrobras

Focused on enhancing efficiency

Last quarter, Petrobras produced 2,804 thousand barrels of oil equivalent per day, representing an increase of 7% from the first quarter of 2016. This increase in the production was accompanied with a decline of 18% in its operating costs. The decline in operating expenses at Petrobras was the result of a reduction in refining costs as the company has been looking to integrate its common and interdependent activities among the refineries.

Also, Petrobras' efforts of optimizing its support resources, reducing power consumption, increasing the use of catalyzers and chemicals, and reducing maintenance expenditure will lead to a further decline in operating costs. Additionally, Petrobras has lowered its lifting costs by over 8% in the first half of 2016 from that of 2015 levels.

Looking ahead, it expects its lifting costs to decrease by another 13% in the next couple of years, which should further lower its operating costs. The chart given below clearly illustrates how Petrobras has reduced its refining and lifting costs for the last couple of years and the way ahead.

Source: Petrobras


In my opinion, things should get better for Petrobras going forward. The company has managed to improve its cash flow profile, which should continue to improve as debt reductions take place. So, it will be a good idea to remain invested in Petrobras since the stock's rally could continue going forward as it takes advantage of improving oil prices by lowering its costs.

Summary :

  • Richard Keanegreat article and in such detail. Could you write a detailed article in regards to crypto currency trading, as in Bitcoin and ILCoin. Your ATS Automated Trading system. is that your business, if so I would like to talk with you about a 4 in 1 trading system, hoping you could research it. Loved all your input, charts and graphs. Richard

    2 years ago

    J BBeen awhile since Ive been on this site. My new business is I only build for Ninjatrader7 and futures contracts.

    6 months ago