Petroleo Brasileiro S.A. (ADR) (PBR): 4Q2007 weaker than expected due to higher costs - Goldman sachs - March 04, 2008
What's changed
Petrobras reported 4Q2007 EPS of US$1.29 versus our estimate of $1.64. Revenues were slightly higher than expected, but overall EBITDA of $6.8 billion was below our $7.2 billion estimate mainly due to higher costs, much of which we suspect was exchange-rate driven. Specifically, lifting costs rose to $8.60/BOE from $7.65/BOE in 3Q2007 and $7.24/BOE in 4Q2006. SG&A rose to $1.9 billion for the quarter versus $1.7 billion in 3Q2007 and $1.5 billion in 4Q2006. We are updating our 2008-2012 EPS to $6.14 ($6.44 previously), $9.20 ($9.43), $7.64 ($8.21), $6.95 ($7.36) and $2.28 ($2.68), respectively.
Implications
Although production growth slowed in 2007, Petrobras remains unique in its ability to grow oil production for a company of its size.
We believe the key catalysts going forward for Petrobras shares are:
(1) delineation of the TUPI discovery and other exploration announcements offshore Brazil;
(2) the impact of cost inflation, seen both during the quarter via higher operating costs as well as in high capital spending relative to cash flow; and
(3) investor attitudes toward emerging markets and Brazil specifically.
Valuation
Petrobras trades at 12.9X 2008 EV/debt-adjusted cash flow, a premium to the emerging market average of 9.2X. Petrobras’ growth potential and its exposure to offshore Brazilian basins warrant a premium, in our view. However, we continue to rate the shares Neutral relative to a Neutral coverage view, and we have a 12-month price target of $105, which is based on debt-adjusted cash flow multiple.
Key risks
Commodity price volatility, drilling results, cost pressures, investor sentiment towards emerging markets and government pronouncements are key risks. |
