We are downgrading Petroleo Brasileiro S.A. or Petrobras (PBR) ADRs to Neutral from Outperform, as we are concerned by the significant increase in its downstream investment level in the face of a bearish refining margin outlook.
Petrobras has pegged its 2010 capital budget at R$88.6 billion. Of this, R$34 billion will go towards the downstream segment, which is considerably higher than the earlier guidance. Considering the bearish refining margin environment that is likely to prevail over the coming 6 – 12 months, this remains a major risk going forward.
Uncertainty over the capitalization timeline and the pending oil and gas regulatory framework also remain near-term headwinds, in our view. Unpredictable energy prices and government ownership/control adds to the downbeat sentiment.
However, the company’s strong pipeline of development projects, impressive recent exploration successes, and a growing domestic market offsets most, if not all, of the negatives.
We believe that the continuous demand growth in Brazil (expected to outperform developed countries in the next few years), together with all the new investments and acquisitions, will fuel Petrobras’ medium-term earnings outlook. Additionally, we expect the company to benefit from its expertise in deep-water operations, huge recent discoveries (that could double its resource base) and the growing domestic refined products market.
As such, we see the stock performing in line with the broader market.
Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the largest in Latin America. The company’s activities include: the exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and in the refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
Read the full analyst report on “PBR”
Zacks Investment Research
