Morningstar

Petrobras Impresses, but Shares Overpriced

The progress that the new management team has delivered as well as future improvement is largely reflected in the current stock price.

Securities In This Article
Petroleo Brasileiro SA Petrobras ADR
(PBR)

Importantly, the improved performance led to net debt/EBITDA falling to 3.5 times from 5.1 times a year ago and demonstrated that Petrobras is on track to achieve its year-end 2018 goal of 2.5 times. We think this target is achievable, assuming that oil prices hold at current levels or move higher. That said, our forecast is for oil price weakness in 2018 ($45 a barrel average), which would imply that Petrobras will fall short of its goal, although an eventual recovery in prices would mean the target is ultimately achievable, if later than expected. Net debt/capital fell to 55% from 60% at the end of last year as the real's strength reduced the debt balance. While free cash flow slipped from the third quarter, Petrobras still delivered BRL 12.0 billion during the fourth quarter and BRL 41.6 billion for the full year, a marked improvement over 2015, on reduced spending levels. We expect continued delivery of free cash flow will allow for debt reduction in the coming years. While we remain impressed by the ongoing turnaround that the company and new management team have delivered, we think this progress as well as future improvement is largely reflected in the stock price. Our fair value estimate and no-moat rating are unchanged.

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About the Author

Allen Good, CFA

Director
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Allen Good, CFA, is a director, Europe, for Morningstar*. Based in Amsterdam, he covers the oil and gas industries as well as manages a team of multi-industry analysts. He is also chair of the Morningstar Research Services Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat ratings issued by Morningstar. In this role, he is responsible for ensuring consistent application of Morningstar’s Economic Moat methodology across sectors and regions as well as updating and revising the methodology. His specialty is global integrated oils such as Exxon, Chevron and Shell and US independent refiners such as Valero and Marathon Petroleum. He also contributes to developing hydrocarbon price and petroleum product margin forecasts used in valuation models.

Before joining Morningstar in 2008, He performed merger and acquisition advisory work for a middle-market investment bank. Before that, he spent several years at Black & Decker in various operational roles, primarily focused on manufacturing and distribution.

Good holds a bachelor’s degree in business from the University of Tennessee and a master’s degree in business administration from Kenan-Flagler Business School at the University of North Carolina. He also holds the Chartered Financial Analyst® designation.

* Morningstar Holland BV (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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