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Morningstar | Petrobras Earnings Rise, but Production Falls in 3Q

Petrobras reported third-quarter results that were improved from the year earlier but were dampened by charges related to settlements to close investigations with U.S. authorities. Adjusted EBITDA increased to BRL 29.9 billion from BRL 19.2 billion a year ago but fell below second-quarter levels of BRL 30.0 billion. However, excluding the settlements, adjusted EBITDA was BRL 33.4 billion. The year-over-year increase was largely attributable to the upstream segment that saw adjusted EBITDA rise to BRL 27.9 billion from BRL 14.6 billion a year ago on higher oil prices. Production fell 8.5% from a year ago due to asset sales and maintenance activity. We expected slight declines in production this year, but the year-to-date production decline of 6% is tracking below our estimates even accounting for the asset sales. However, given the slate of FPSOs scheduled for delivery, we continue to expect strong production growth during the next few years. Our fair value estimate and moat rating are unchanged.

While the downstream segment delivered improved results compared with last year with adjusted EBITDA rising to BRL 6.7 billion from BRL 5.9 billion, it fell compared with the second quarter’s BRL 8.8 billion. Lower exports and higher imports were the primary culprit; however, the segment continues to fair well considering the government’s mandated diesel price freezes that prompted a drop in the share price earlier this year. Including subsidies, domestic diesel prices are on par with international benchmarks. The gas and power segment delivered disappointing results with an adjusted EBITDA loss of BRL 674 million compared with a gain of BRL 1.6 billion last year due to higher LNG import expense.

Free cash flow remained positive but fell to BRL 8.1 billion from BRL 14.7 billion last year and BRL 16.4 billion in the second quarter due to settlement payments and higher spending. Positively, net debt continued to fall, slipping to $72.9 billion from $84.8 billion at the end of 2017 resulting in net debt to EBITDA ratio improving to 2.96 from 3.67.

While the results didn’t meet market expectations, they demonstrate Petrobras is continuing to move in the right direction. We view the continued debt reduction and settlement of investigations as positives. The soft production figures elicit some concern, but we remain confident that Petrobras will resume growth next year with a greater number of wells scheduled to be drilled and a strong slate of new projects to start. Furthermore, given Petrobras' past inability to deliver on production guidance we already include a lower figure in our 2022 forecast than management’s guidance.