Oil giant Petrobras (PBR, Financial) has one basic problem: Its largest shareholder is the Brazilian state. Hence, since the company operates serving the needs and preferences of its biggest shareholder, Petrobras not always does what is best for itself. The company also serves a social purpose. This means that, since Brazil is trying to fight off inflation, Petrobras shall not increase oil prices as much as the company needs to meet its Capex needs. Not only the company will increase prices by just 4% (gasoline) to 8% (diesel) - well below expectations - but also the company will not give investors the clear pricing formula the market was expecting. Let's take a look at the company's future and decide whether Petrobras is worth buying or not. After all, the shares are down by 19% year-to-date (ytd).
Petrobras' Outlook Looks Somewhat Grim in the Short Term
The lack of a clear pricing formula was taken by the market as sign that current management, which is perceived to be a very professional one, could not force Petrobras's board – which is clearly dominated by the government – to adopt a clear and very much needed pricing strategy. Petrobras' domestic prices will remain 17% (gasoline) and 22% (diesel) below international levels when the company needs huge investments in order to develop its vast oil and gas reserves.
According to Credit Suisse, “If the Real remains at the current 2.30 rate in 2014, Petrobras has to raise $25 billion of capital to close the gap between a $30 billion cash generation, $40 billion Capex spending, and $15 billion of debt expenses.” According to the same bank, even if Petrobras manages to close such financing gap and holds its dividend payment at just $4 billion, the company's cash balances should decrease to $12 billion. A cash level similar to what it was just prior to the 2010 equity issuance.
Above I gave you a few reasons to beware Petrobras' shares. That said, it would be unfair not to cite some positives. First of all we have production growth. Secondly there is now a strong, technical management team led by the current CEO, Graça Foster, who has achieved higher efficiency through cost cutting. Overall, it looks like Petrobras' problems will persist in the short term, but the company is extremely valuable. It controls a huge growing market and it holds huge potential oil and gas reserves. In addition, its debt at 3 times EBITDA. Although high, this still looks sustainable.
Bottom Line
As I mentioned before, Petrobras, which is held by Ray Dalio and David Dreman has some problems ahead and might face some pressure since the company has huge cash needs for the next couple of years. On the other hand, the company holds huge value. Trading at 7 times 2014 EV/EBITDAX, 13.4 times earnings and being expected to pay a below average dividend yield – the oil industry currently offers a 5.1% dividend yield – I believe it's time to start looking at Petrobras, but it's not yet time to start buying the company's shares. Comparable companies such as Italy's Eni (E, Financial) – which is also controlled by the state – and British Petroleum (BP, Financial) trade at 5.1 and 5.3 times EV/EBITDAX, respectively. In addition, they both pay above average dividend yields.
Petrobras' Outlook Looks Somewhat Grim in the Short Term
The lack of a clear pricing formula was taken by the market as sign that current management, which is perceived to be a very professional one, could not force Petrobras's board – which is clearly dominated by the government – to adopt a clear and very much needed pricing strategy. Petrobras' domestic prices will remain 17% (gasoline) and 22% (diesel) below international levels when the company needs huge investments in order to develop its vast oil and gas reserves.
According to Credit Suisse, “If the Real remains at the current 2.30 rate in 2014, Petrobras has to raise $25 billion of capital to close the gap between a $30 billion cash generation, $40 billion Capex spending, and $15 billion of debt expenses.” According to the same bank, even if Petrobras manages to close such financing gap and holds its dividend payment at just $4 billion, the company's cash balances should decrease to $12 billion. A cash level similar to what it was just prior to the 2010 equity issuance.
Above I gave you a few reasons to beware Petrobras' shares. That said, it would be unfair not to cite some positives. First of all we have production growth. Secondly there is now a strong, technical management team led by the current CEO, Graça Foster, who has achieved higher efficiency through cost cutting. Overall, it looks like Petrobras' problems will persist in the short term, but the company is extremely valuable. It controls a huge growing market and it holds huge potential oil and gas reserves. In addition, its debt at 3 times EBITDA. Although high, this still looks sustainable.
Bottom Line
As I mentioned before, Petrobras, which is held by Ray Dalio and David Dreman has some problems ahead and might face some pressure since the company has huge cash needs for the next couple of years. On the other hand, the company holds huge value. Trading at 7 times 2014 EV/EBITDAX, 13.4 times earnings and being expected to pay a below average dividend yield – the oil industry currently offers a 5.1% dividend yield – I believe it's time to start looking at Petrobras, but it's not yet time to start buying the company's shares. Comparable companies such as Italy's Eni (E, Financial) – which is also controlled by the state – and British Petroleum (BP, Financial) trade at 5.1 and 5.3 times EV/EBITDAX, respectively. In addition, they both pay above average dividend yields.
