Petroleo Brasileiro Petrobras SA (ADR) (PBR) Stock Has 48% Downside: Credit Suisse
A research note by Credit Suisse claims Petrobras stock has 48% downside. Bidness Etc discusses the research firm’s explanation
http://www.bidnessetc.com/43128-petrole ... dit-suiss/
By: MICHEAL KAUFMAN
Published: May 19, 2015 at 9:47 am EST
Credit Suisse analysts claim that the Brazilian oil producer Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is giving investors hope, but not cash.
In a research note issued on May 17, Credit Suisse expressed its belief that Petrobras investors have been given hope in the form of better-than-expected earnings results, but bigger concerns still remain.
Petrobras published its earnings results for the first quarter of fiscal year 2015 (1QFY15) on Friday. The company reported earnings before interest, taxes, depreciation and amortization (EBITDA) of 21.5 billion Brazilian reais, beating Credit Suisse’s 17 billion Brazilian reais estimate. Furthermore, the quarter’s net income clocked in at 5.3 billion Brazilian reais, compared with the sell-side research firm’s 4.4 billion Brazilian reais expectation.
The earnings beat was helped by certain non-recurring items. The reversal of G&P provisions was 1.3 billion Brazilian reais, whereas exploration expenses were 1 billion Brazilian reais lower. There were some positives in the company’s results, including lower lifting costs and higher refining margins, according to the research note. Wider refining margins can be attributed to the drop in recent crude oil prices, and the current Brazilian policies, which allow the state-run oil company to sell oil to consumers at a 10% premium.
Credit Suisse claims that despite low oil prices, signs of cost control and the positive earnings results can give hope to the company’s investors. It could also buy Petrobras enough time to introduce its strategic plan, which is scheduled to be released next month. Credit Suisse views it as a “key date” for the market to comprehend the company’s plan to deleverage itself. As of now, Petrobras is the world’s most indebted public oil company with over $100 billion worth of debt on its books.
One concern about the earnings report, pointed out by Credit Suisse analysts, is the EBITDA-to-cashflow-conversion ratio. Even though Petrobras posted a 50% year-over-year (YoY) increase in EBITDA, the conversion ratio stays low. Cash flow from operations clocked in at 16 billion Brazilian reais, which implies a 75% conversation ratio, compared with EBITDA of 21.5 billion Brazilian reais.
The current EBITDA-to-cashflow conversion ratio is much lower than Petrobras’ historical average of 85-90%. A low conversion ratio makes the net debt-to-EBITDA ratio of 3.8 less meaningful in Credit Suisse’s view.
Credit Suisse remains concerned about Petrobras’ ability to deleverage itself. In the following quarters, the research firm expects minimal production growth, coupled with a weaker Brazilian real and a higher Brent oil price. These factors have already affected the extraordinary margins enjoyed by the company’s refining business. Furthermore, it casts doubt over Petrobras’ plans to reduce its net debt in absolute dollar terms, which Credit Suisse believes is the only way for the company to return tangible wealth to its shareholders.
Credit Suisse sees different scenarios with Petrobras’ current situation. The oil producer has been involved in a corruption scandal that has marred its fortunes. A federal investigation has been going on since fifteen months, after Brazilian prosecutors accused former company executives of working with a cartel, formed by engineering firms, to steal funds from Petrobras’ accounts.
The scandal coincided with the worst crash in crude oil prices since 2009, when a “perfect storm” emerged for Petrobras, as JP Morgan has termed the situation. Financial challenges continue to mount for the oil giant amid all the controversy.
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