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Morningstar | PBR Updated Forecasts and Estimates from 08 Mar 2019

Petrobras continued its solid performance during the year into the fourth quarter, reporting adjusted EBITDA of BRL 29.2 billion compared with BRL 13.0 billion a year ago. Meanwhile, free cash flow jumped to BRL 17.1 billion from BRL 6.6 billion last year, bringing its full-year total to BRL 54.6 billion from BRL 44.1 billion last year. The strong performance combined with debt reduction resulted in Petrobras reporting debt/EBITDA of 2.34 at year-end from 3.67 last year, below its 2.5 target and demonstrating the progress it’s made on reducing its leverage, a key concern among investors. Our fair value estimate and moat rating are unchanged.

Upstream adjusted EBITDA jumped to BRL 25.8 billion from BRL 17.9 billion a year ago on higher prices and lower lifting costs. Production continued to slide, however, falling nearly 3% during the quarter and 5% for the full year, due in part to divestments. However, growth should resume next year with the installation of new units. Management is guiding for growth of 6.5% in 2019 with a CAGR of 5% through 2023.

The downstream segment reported adjusted EBITDA of a loss of BRL 1.1 billion compared with a gain of BRL 8.8 billion last year on narrower margins due to inventory built at higher prices and greater imports. The gas and power segment increased adjusted EBITDA to BRL 3.9 billion from BRL 1.8 billion last year.

The return of losses from the downstream segment might pique concerns given the segment’s history of large losses and the recent government intervention. But we don’t view the quarter as overly troublesome given current pricing policies are more favorable than they have been in the past despite recent price freezes and the fact that Petrobras is also receiving subsidy payments. We don’t expect strong performance from the segment going forward, especially in times of rising oil prices, but we don’t anticipate a return to the large losses, either. Importantly, investment in the segment is much reduced as well.

As such, the growth in production should lead to continued growth in free cash flow and further debt reduction, leaving Petrobras on surer footing over time.