We are maintaining our Neutral recommendation on Petroleo Brasileiro S.A. or Petrobras (PBR) ADRs with a target price of $38.
 
We believe that continued 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, its huge recent discoveries (that could double its resource base) and the growing domestic refined products market.
 
However, we are concerned about the significant increase in its downstream investment level in the face of a bearish refining margin outlook. Investor skepticism regarding the company’s huge investment requirements, as well as the possibility of heightened state interference and earnings dilution following the $70 billion share sale, also remains near-term headwinds, in our view. Consequently, we do not anticipate a significant upside in the near future and expect the stock to perform in line with the broader market.
 
(Read our full coverage on the Petrobras share sale: Petrobras Share Sale Sets Record)
 
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.
 
PETROBRAS-ADR C (PBR): Free Stock Analysis Report
 
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