{"id":23678,"date":"2023-06-16T19:33:57","date_gmt":"2023-06-16T23:33:57","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/petrobras-the-worst-avoided-nysepbr\/"},"modified":"2023-06-16T19:34:00","modified_gmt":"2023-06-16T23:34:00","slug":"petrobras-the-worst-avoided-nysepbr","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=23678","title":{"rendered":"Petrobras: The Worst Avoided (NYSE:PBR)"},"content":{"rendered":"
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The Worst Avoided<\/h2>\n

Following the election of President Lula, many expected Petrobras (NYSE:PBR<\/span>) to take on excess debt, refine at a loss, and invest in return-dilutive projects. However, Brazilian officials and executives are signaling a different outcome:<\/p>\n

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“The priorities to use cash flow must be, as in any company, solid projects.” – CEO Jean Paul Prates<\/p>\n

“[Fuel prices will not fall] below profitability.” – CEO Jean Paul Prates<\/p>\n

“We need to be sure that our investments will be self-funded with our operational cash flow.” – CFO Sergio Caetano Leite<\/p>\n

“Petrobras will become more attractive to serious, long-term investors. We are now moving to a commercial-freedom policy.” – Energy Minister Alexandre Silveira<\/p>\n<\/blockquote>\n

PBR’s valuation is re-rating as political fears abate. Insulated in a fundamentally strong Brazilian economy, Petrobras appears set to benefit from best-in-class assets, currency gains, and global instability.<\/p>\n

Best-In-Class<\/h2>\n

In commodity businesses, where there is no product differentiation, the key moat is being the low-cost producer. Enter Petrobras, which owns some of the world’s best offshore oil assets. Petrobras extracts pre-salt oil at a very low cost. The company’s chief exploration and production officer, Fernando Borges recently said:<\/p>\n

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“Breakeven is nearly US $20 per barrel.”<\/p>\n<\/blockquote>\n

This gives the company a huge cost moat over global peers. In comparison, the Permian Basin (In the U.S.) has break-even prices on existing wells of $30\/barrel WTI (Roughly $32 Brent). Brazil’s offshore Campos Basin and Santos Basin are right up there with the Permian as some of the world’s best, low-cost oil fields. And, Petrobras is at the “forefront” of offshore and deepwater technology. Operating within these lucrative areas, Petrobras has crushed peers’ margins, as we’ll soon see.<\/p>\n

When oil prices fall, Petrobras is one of the last producers to suffer. This was evident in 2020 when the company produced $22 Billion of free cash flow. While other oil producers saw their operating margins plummet, Petrobras’ margins just kept climbing:<\/p>\n

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Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

As did its cash flow:<\/p>\n

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\"Chart\"
Data by YCharts<\/figcaption><\/figure>\n<\/p>\n

The company also has monopoly-like scale in refining. With over 80% of Brazil’s refining capacity, the company is a price-setter, not a price-taker.<\/p>\n

Petrobras makes most of its revenue from the refining, transportation, and marketing segment, but most of its profit comes from the exploration and production segment, producing the oil needed to propel South America forward. Petrobras’ net income by segment (2022):<\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n
_______________________________<\/td>\nUSD, Billions<\/td>\n<\/tr>\n
Exploration and Production<\/td>\n$32.07<\/td>\n<\/tr>\n
Refining, Transportation, and Marketing<\/td>\n$7.43<\/td>\n<\/tr>\n
Gas and Power<\/td>\n$1.04<\/td>\n<\/tr>\n
Corporate and Other<\/td>\n($3.02)<\/td>\n<\/tr>\n<\/table>\n

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