Petroleo Brasileiro SA (PBR, Financial), known more commonly as Petrobras, is continuing its magnificent run after reporting excellent second-quarter results. Many seem divided on the future of oil prices and, in turn, oil stocks. However, that's a topic on its own, and outside the scope of this article. Personally, I remain bullish on oil stocks, and Petrobras is one of the "best in class" stocks out there; here's why I believe Petrobras still has room to run.
Earnings report
The company beat its quarterly revenue estimate by $3.19 billion, presenting a 65.4% year-over-year rise. Moreover, Petrobras's quarter-over-quarter Ebitda increased by a staggering 34%, conveying a general increase in company value.
Looking ahead, Petrobras could yield significant financial results due to aggressive capital expenditures. CapEx increased by 74% versus last quarter, mainly due to signage fees attributed to the Sépia and Atapu fields, meaning that we could witness an increase in future output.
Lastly, the company expects its refinery operations to remain consistent at 86% capacity utilization, supporting Petrobras' vertically integrated business model, which has been fundamental to the company achieving economies of scale at 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 a large part. Nonetheless, commodity prices would need to recede by a long way before Petrobras becomes overvalued.
According to 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.
Furthermore, Petrobras' price-earnings ratio of 3.29 is considered low compared. The stock is trading 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, following Petrobras' successful quarter, it announced that it would shower its investors with a record dividend of 6.732 Brazilian reais ($1.30) per share, amounting to a forward dividend yield of roughly 4.29%.
Concluding thoughts
Holistically speaking, key quantitative metrics suggest that Petrobras provides solid total return potential. The market will definitely see fluctuations in oil and gas prices. As such, investors should bear any systemic activities in mind.
However, by purely looking at the asset as an energy play, it can be considered "best in class." Petrobras' market dominance needs to be considered. As a highly dominant player in the Latin American energy industry, Petrobras stock will likley avoid some cyclical headwinds, leading to more sustainable returns for its stockholders.
