Thesis Summary
Petróleo Brasileiro S.A. aka Petrobras (NYSE:PBR) has sold off after its latest earnings report.
It would seem that investors were disappointed with the new dividend announcement and perhaps some of the newly resurfaced risks relating to Brazil’s political situation.
However, PBR continues to pay out a great yield, has been running a smooth operation, and has plenty of growth and value to offer investors.
Long term, I like oil, Brazil and I really like PBR. This is the time to double down.
In my last article on PBR, I discussed how I thought PBR was the best way to play the coming oil bull market. While we have yet to reach higher oil prices, I still believe it’s a matter of time. This selloff should be seen as an opportunity to accumulate more shares, and I am upgrading to a strong buy.
Q4 Results
Starting with the Petrobras income statement, we can see revenue fell year-on-year.
The difference was more noticeable when we look at the EPS, down almost $1 since last year. PBR had proportionally higher expenses, with a noticeable increase in impairment losses and “other income and expenses,” which are related to payments for benefit plans.
On the production side, PBR managed to increase its production vis-à-vis 2022 by 6.2% compared to last quarter.
The fall in revenues can be attributed mostly to the decline in oil prices this year compared to last.
Nonetheless, the company has done reasonably well in maintaining growth and strong operating cash flow.
The company generated FCF of $31.1 billion, which it used in dividends and buybacks mostly, and even had some left to increase its cash position.
The dividend for this quarter was $1.10 reals/share, and there were also some buybacks. However, a lot of investors were expecting higher payout, or even a special dividend.
However, the payout is equivalent to $2.9 billion, which adds up to a quarterly dividend of 3.1%, still a pretty big yield.
Why I Still Like PBR a Lot
There are three main reasons I like PBR here. I am bullish on oil, I think Brazil’s economy has a lot to offer, and I think PBR is executing well.
Oil Outlook
Starting with the oil market, while prices have failed to move much in the last few months, long term oil is going higher.
Fundamentally, it seems like, in the coming decade, we won’t be able to escape higher than average inflation, and this is based on the shift we have witnessed towards fiscal dominance.
Fiscal spending has taken center stage following the COVID crisis. Never before has the U.S. spent so much at a time of peace and strong economic indicators. While this may help the economy for now, inflation will eventually reignite.
Furthermore, with the interest rates so high, it seems that the Fed can’t really do much about “stimulate” the economy. Rate cuts will spur private credit, bur rate hikes will increase the interest burden, and that will actually contribute to inflation.
The Fed has already signaled it wants to cut and it might even wind down QT, and the last inflation report already came in hotter than expected.
From a technical perspective, I think oil (CL1:COM, USO) still has to complete another impulse higher. Now, before that I would like to see it grind down towards the $50 area.
Brazil Outlook
Brazil is one of the largest countries in the world, it has plenty of natural resources, and is on its way to digitizing its economy and catching up with the western countries.
The population is still mildly growing, and there’s not such a big problem with the ageing population.
Last year, Brazil grew by 2.9%, and we saw growth in consumer spending. While in 2024 the economy could slow down, it will be supported by further rate cuts.
Petrobras Outlook
Petrobras has performed well in the face of a challenging environment, and has done better than most of its peers.
It has achieved high EBITDA and FCF, while also growing its oil and gas production.
This has allowed the company to also strengthen its financial position.
And lastly, the company has been executing on its production targets, even exceeding them. PetroBras continues to grow, and has also acquired stakes in three units on the west coast of Africa and 29 in the Pelotas basin.
Technical Analysis
Looking at PBR’s stock, we are now at an interesting point to buy.
We are finding support at the 50 week MA, in what I believe to be wave 2 inside a larger wave 3 to the upside. If support here breaks, then we have much stronger support coming in at around $12, which is the bottom of the trendline and the 200 week MA.
Risks
The biggest risk with Petrobras continues to be political. Allegedly, President Lula may have been involved in the decision of not paying out a special dividend.
“ula directly told Petrobras Chief Executive Officer Jean Paul Prates and his team in a recent meeting at the presidential palace that the company should limit investor payouts and reinvest instead, according to people familiar with the matter.
Source: Yahoo news.
The problem, though, isn’t the special dividend, but the fact that Lula could continue to be involved in future decisions, especially investment ones.
In this regard, some fear Petrobras might invest too much in less profitable green energies.
While this continues to be a risk factor, there’s not yet enough evidence here that Lula’s presidency is affecting PBR’s performance.
Takeaway
In conclusion, Petrobras continues to be a good play on oil, and still offers a handsome dividend. I wouldn't pass up on the opportunity to pick up some shares at this price.
This is just one of many exciting international equities you can buy right now! The current environment is ripe for outsized gains in this asset class.
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