Brazil’s Rio de Janeiro-based oil concern Petróleo Brasileiro S.A. - Petrobras (PBR) is one of the largest oil and gas producers in the world. It explores for, refines, and transports crude oil from producing onshore and offshore oil fields. 

Shares of the vertically integrated oil and gas company have gained 19.6% in price over the past month and 20.9% over the past six months. Increasing prices of oil products in the domestic market and the company’s efforts to diversify its customer base have boosted its profitability. The stock hit its 52-week high of $12.93 on January 20.

PBR achieved its 2021 production target and recorded a 200% higher volume of LNG imports than in the previous year. In addition, investor optimism surrounding the state-run company’s plans to test new renewable diesel bodes well for the stock. Because the demand for its oil byproducts and natural gas remains strong, we think PBR is well-positioned to maintain its growth and deliver solid returns.

Here is what we think could shape PBR’s performance in the coming months:

New Renewable Diesel Could See Strong Demand

PBR has entered a partnership with Vibra Energia SA, a fuel distributor, to evaluate its new renewable diesel that is partly made from edible oils. The company plans to offer 120,000 liters of renewable diesel produced at its Repar refinery. Its fuel will be tested by Auto Viacao Redentor, a fleet owner, on its three bus lines running in Curitiba for the next six months. As the oil and gas producer starts testing its R5 diesel with customers, it is poised to see solid demand going forward.

Strategic Disinvestment from Non-Core Assets

PBR and industrial conglomerate Novonor filed for a secondary offering to sell nearly 154.9 million preferred shares of Braskem SA. PBR will offer approximately 75.74 million class A preferred shares of petrochemicals maker Braskem. The combined entity could raise roughly $1.5 billion and keep just the common shares. This strategic disinvestment should enable PBR to concentrate on the pre-salt region in Brazil’s deep waters.

Solid Growth Story

A $0.69 consensus EPS estimate for the next quarter, ended March 2022, indicates a 1,625% improvement year-over-year. Also, analysts expect PBR’s revenue to rise 6.2% year-over-year to $87.93 billion in its fiscal 2022.

PBR’s revenue has increased at a 5% CAGR over the past three years. Also, its EBITDA has grown at a 19% CAGR over the same period. And the company’s EPS and net income have grown at CAGRs of 101.1% and 95.1%, respectively, over the past three years. Furthermore, PBR’s tangible book value has increased at an annualized rate of 8% over the same period.

Impressive Financials

PBR’s net revenue rose 10.8% sequentially to $23.26 billion in the third quarter, ended September 30, 2021. Its net revenue from oil byproducts came in at $14.40 billion, driven primarily by growth in revenue in naptha and fuel oil. Also, PBR witnessed a 28.7% growth in revenues from natural gas and 75.6% growth from electricity, driven by higher demand for thermoelectrics. PBR’s adjusted EBITDA grew 87% year-over-year to $11.62 billion, due mainly to a climb in Brent prices and growth in sales volume in the domestic market.

POWR Ratings Reflect Promising Outlook

PBR has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. PBR has a Quality Grade of A. This justifies the stock’s 58.6% gross profit margin, which is 50.8% higher than the 38.9% industry average.

Also, in terms of Momentum Grade, PBR has an A. The stock’s price return over the past month is in sync with this grade. Click here to see the additional POWR Ratings for PBR (Sentiment, Stability, Growth, and Value).

The stock is ranked #18 of 48 stocks in the A-rated Foreign Oil & Gas industry.

Bottom Line

PBR’s strategic initiatives and continuing investments in profitable assets should position it uniquely to generate a solid cash flow. Furthermore, an increase in Brent prices and strong thermoelectric demand in Brazil should position it to deliver higher revenue growth in the coming quarters. Thus, we think it could be wise to bet on the stock now.

How Does Petróleo Brasileiro (PBR) Stack Up Against its Peers?

PBR has an overall B rating in our proprietary rating system. Check out these other stocks within the Foreign Oil & Gas industry with A (Strong Buy) ratings: Geopark Ltd. (GPRK) and TransGlobe Energy Corporation (TGA).

Note that TGA is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

PBR shares fell $12.67 (-100.00%) in premarket trading Monday. Year-to-date, PBR has gained 15.39%, versus a -7.79% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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