Petroleo Brasileiro S.A. (ADR) (PBR) Buy: Resource long in a resource short world; adding to Buy List - Goldman Sachs - May 30, 2008
Source of opportunity
We are transferring primary coverage of Petroleo Brasileiro to Arjun Murti from Brian Singer and now include it in our Americas integrated oil coverage universe (Attractive coverage view). We are adding Petrobras to the Americas Buy List, with 16% upside to our revised $84 ($70 before) 12-month target price. While we recognize Petrobras shares have performed well in recent years, we see meaningful further upside potential given its exposure to substantial oil resource upside in the prolific Campos Basin and pre-salt plays offshore Brazil. In a resource short world, Petrobras is one of the few publicly-traded companies that is resource long.
Catalyst
Key catalysts for its shares include:
(1) continued strength in both crude oil prices and the Brazilian real;
(2) exploration success in the emerging pre-salt play in the Santos Basin;
(3) execution of its production growth plan;
(4) exploration and development success in the traditional Campos Basin plays; and
(5) further momentum in its non-Brazil E&P programs, in particular in the deepwater Gulf of Mexico.
Valuation
Petrobras currently trades at 9.9X 2009E EV/DACF, which is at a premium to most of the global integrated oils we cover. Given similar confidence in long-term E&P volume growth and returns potential, we see Suncor Energy, which trades at 10.0X 2009E EV/DACF, as perhaps the most comparable global peer for Petrobras. Our $84, 12-month target price reflects an 11X 2009E EV/DACF valuation, which is still at a discount to the 11.5X 2009E EV/DACF target valuation we assume for Suncor. We have updated our 2008-2012 EPS estimates.
Key risks
Key risks include sustained lower crude oil prices, depreciation of the real, and adverse fiscal/regulatory developments in Brazil. |
