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Petrobras: Why Investors Shouldn’t Fret Its Production Cut
Stock Analysis & Ideas

Petrobras: Why Investors Shouldn’t Fret Its Production Cut

Petrobras (PBR) is a Brazilian state-owned energy company with a strong presence in the oil and gas space. I am bullish on the stock.

Production Update

Petrobras has lowered its 2022 production guidance to 2.6 million barrels per day from a previous 2.7 million with a range of roughly 4%. Furthermore, the firm has also lowered its 2023-2026 oil and gas production targets by 100 000 barrels equivalent per day.

The reason for the reduced production forecast is due to Petrobras’ shared-production agreement on its Atapu and Sepia oilfields, leaving the firm with less than anticipated inventory.

I don’t think that investors should worry too much about this as it’s a transitory issue. Petrobras still holds dominance in the Brazillian pre-salt space, which has been printing money for the firm in recent times and may well persist for years ahead.

How the Market Plays Into This

Petrobras stock does correlate with oil prices, and that’s why we’ve seen gains this past year as crude oil surged up to near the $100 mark. However, this doesn’t mean that the company’s stock price will decline when oil prices eventually calm down; Petrobras’ breakeven sales price is $20, which is a long stretch lower from current levels. I’d say that we’re likely to see a very profitable company as long as oil prices stay 1.5x above the firm’s breakeven level.

Another aspect to consider is global GDP growth as mature industry growth tends to correlate with broader economic expansion/or decline. According to the International Monetary Fund, global GDP will grow by approximately 4.4% this year, well above the general upper bound.

Valuation & Momentum

Even after its nearly 30% annual gain, we’re still looking at a significantly undervalued stock here. Petrobras is trading at a forward price to earnings value of only 6.14, 57% below its sector average. Furthermore, the oil giant’s price to book ratio is trading at a sector discount worth 30% and a forward price to cash flow discount of 58.56%, suggesting that there’s value in abundance.

Petrobras is also on a fierce momentum trend by trading above its 10-, 50-, 100-, and 200-day moving averages. I’m a big fan of momentum plays; A recent study by Cambridge’s Jude business school found that momentum stocks that beat their sector peers in the prevailing 12-months are likely to outperform the same group by 17.5% in the following year.

Wall Street’s Take

Turning to Wall Street, Petrobras has a Moderate Buy consensus rating, based on two Buys and two Holds assigned in the past three months.

The average Petrobras price target of $14.13 implies 5.8% upside potential.

Concluding Thoughts

Petrobras’ bull run is far from over. The company’s yet to fully benefit from rising oil prices due to its breakeven price being much lower than its competitors.

In addition, the stock is undervalued, in my opinion, which is being reflected in its momentum pattern.

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