Like Forbes’ writer Kenneth Rapoza puts it: “Can this dud of an oil company possibly disappoint investors more? Yes, it can!”
A recent Itau report about Petrobras questions how cheap is cheap enough for this under performer stock. After all, in a recent conference call with analysts, Petrobras’ CEO stated that 2013 will likely be even worse than 2012. According to Ms. Foster, production may increase in the second half of the year but improvements against 2012 are unlikely, with potential for downside risk. Furthermore, diesel and gasoline imports are expected to continue to hurt results. Domestic prices remain at a discount to international parity and demand for diesel is set to boom this year, reflecting a record harvest for most agricultural commodities and high dispatch from diesel-fired thermal electric plants.
Here is a snapshot from Itau analyst Paula Kovarsky:
“We are reducing Petrobras’ YE13 fair value to BRL 23.6/PETR4 (USD 22.5/PBR/A) from BRL 26.6/PETR4 (USD 24.8/PBR/A) and maintaining the market perform recommendation. The fair value reduction stems from: i) lower domestic oil-production estimates; ii) flat diesel and gasoline prices until the end of 2014; iii) a stronger BRL; iv) higher oil prices in 2013 hurting imports; and v) the faster-than-expected increase in indebtedness.
We now see production falling again in 2013 by 1.5%. Since July of last year, we have called investors’ attention to the risk of negative production growth in 2012, to be followed by a flat 2013. We now have production falling 1.5% in 2013 as well and growing 3% in 2014. In 2016, we have Petrobras producing 2,271 kbpd of oil in Brazil, 229 kbpd less than the company’s arguably conservative guidance of 2,500 kbpd. We note, however, that the risk of delays increases going forward, given the significantly higher reliance on locally sourced rigs and platforms.
We carefully analyzed import needs until the end of the decade and we forecast Petrobras to be importing between 156-190 billion liters of diesel and gasoline and incurring a USD 17-47 billion loss. 2013 will be challenging for Petrobras regarding diesel imports, due to a record harvest of most agricultural commodities and high dispatch from diesel-fired thermal electric plants. We estimate the total losses with imports this year to reach BRL 6.2 billion in the absence of another price increase.
With no prospects for result improvements in the short term, we expect the company to reach the 35% Net Debt/Total Capital limit by 4Q13, while Net Debt/EBITDA is set to reach 3.0x. Risk agencies are apparently willing to give credit to the company’s immense reserves portfolio and potential for production growth in the future. If the company ends up having to call another capitalization, however, only three years after “the biggest capitalization ever,” it would be the end of Petrobras as an equity investment, we believe. In our view, Petrobras’ controlling shareholder keeps on thinking on a day-to-day basis, always hoping for things to improve. Fuel prices will not go up until 2014 and the company will not be allowed to reduce investments in view of cash constraints. In other words, the capitalization ghost will be around, preventing a sustainable stock performance.
Petrobras’ weak balance sheet will likely be used as a justification to further reduce or eventually stop dividends to ON shareholders. In our view, the spread between PN and ON shares, based on dividends’ payment prospects until 2022, could range between BRL 0.8 and BRL 1.8/share, depending on Petrobras’ policy towards ON holders. We forecast ON dividends at BRL 0.16 and PN dividends at BRL 0.8 in 2013, accounting for the BRL 15 billion equity reduction related to rule IAS 19, to be booked in 1Q13. The spread is currently at BRL 2.22/share, so we see room for it to narrow.
One could argue that Petrobras is now cheap enough, at least from a trading perspective. We tend to disagree. It might be cheap, but we really struggle to see the catalysts that will move the needle. After such a bad performance, Petrobras is trading at 8.0x P/E13 and 6.6x P/E14. When compared with integrated IOCs, the company is already trading at 22% discount based on P/E14, while the discount to our selected group of peers including NOCs stands at 13%. But what we see ahead is: i) no further increases in fuel prices this year due to inflation, or next year due to presidential elections; ii) production falling; iii) imports hurting results big time; iv) debt on the rise; v) downside to PN dividends and big uncertainty for ONs; and vi) the ghost of missing investment grade or calling for another capital increase alive, with no clear action from the controlling shareholders to avoid it.”