Petrobras Rises After Revenue – GuruFocus.com
Petroleo Brasileiro S.A. (ACB, Financial), better known as Petrobras, continues its magnificent run after posting excellent results in the second quarter. Many seem divided on the future of oil prices and, therefore, oil inventories. However, that is a subject in itself, and outside the scope of this article. Personally, I remain bullish on oil stocks, and Petrobras is one of the “best in class” stocks; here’s why I think Petrobras still has room to run.
The company exceeded its quarterly revenue estimate of $3.19 billion, posting a 65.4% year-over-year increase. In addition, Petrobras’ Ebitda quarter-over-quarter increased 34%, reflecting an overall increase in enterprise value.
Going forward, Petrobras could generate significant financial results due to aggressive capital spending. CapEx increased by 74% compared to last quarter, mainly due to signaling fees attributed to the Sepia and Atapu fields, which means that we could see an increase in future production.
Finally, the company expects its refining operations to remain constant at 86% capacity utilization, supporting Petrobras’ vertically integrated business model, which has been fundamental for the company to achieve economies of scale with a gross profit margin of 50.89%.
Valuation and dividends
Generally speaking, much of Petrobras’ valuation will depend on the price of oil as its inventory, as well as its proven reserves, play an important role. Nonetheless, commodity prices are expected to pull back a long way before Petrobras becomes overvalued.
Based on the projected free cash flow valuation method, Petrobras could have a price target of $34.28, which if priced by the market could more than double investors’ capital from here. .
Also, Petrobras’ price/earnings ratio of 3.29 is considered low relative. The stock trades at a five-year normalized discount of 73.74% to its price-earnings ratio. Therefore, Petrobras is undervalued on a relative basis.
Moving on to dividends, after Petrobras’ quarterly success, it announced it would flood its investors with a record dividend of 6,732 Brazilian reais ($1.30) per share, a forward dividend yield of around 4 .29%.
From a holistic perspective, key quantitative metrics suggest that Petrobras offers strong total return potential. The market will definitely see fluctuations in oil and gas prices. As such, investors should be aware of any systemic activity.
However, considering the asset solely as an energy game, it can be considered “best in class”. The dominant position of Petrobras in the market must be taken into account. As a very dominant player in the energy sector in Latin America, Petrobras stock will likely avoid some cyclical headwinds, leading to more sustainable returns for its shareholders.