Petroleo Brasileiro S.A. (ADR) (PBR): 3Q2007 results mixed, overshadowed by last week's TUPI discovery - Goldman Sachs - 11/12/07
<bWhat's changed
Petrobras reported 3Q2007 EPS of US$1.31, below our $1.45 forecast. EBITDA, however, was better than expected at $6.8 billion versus our $6.4 billion forecast, mainly on greater-than-expected profitability. We are updating our EPS estimates.
Implications
We believe quarterly results are overshadowed by the company-estimated 5-8 billion gross barrel discovery at the TUPI field in the Santos Basin announced earlier last week. The value of Petrobras' shares is up more than $30 billion in the last two trading days, representing $7.50 per barrel when adjusting the midpoint for Petrobras' 65% interest. We believe the Brazilian offshore is one of the few regions that can continue to show material multiyear growth in crude oil production, and the TUPI discovery only adds to that longer-term growth potential. Ultimately, we believe the value Petrobras receives for its product domestically remains a key catalyst for the stock, and the recent appreciation of the Brazilian real has been supportive of rising fuel product prices in Brazil.
Valuation
Petrobras trades at 7.0X 2008E EV/debt-adjusted cash flow versus 9.1X for selected other emerging market oils. We believe that the impact of the Brazilian real on fuel product pricing as well as Petrobras' large weighting in the Bovespa index will continue to make Petrobras leveraged more to the Brazilian market and economy than to global crude oil prices. We are raising our 12-month multiples-based price target to $105 per share from $55 to reflect more bullish oil prices, the recent discovery, and improved domestic product prices in Brazil. We rate Petrobras Neutral relative to a Neutral coverage view.
Key risks
Brazilian currency and market volatility, commodity price volatility, cost pressures, and government pronouncements are key risks. |
