Lower Oil Prices: Good For Petrobras?
Lower oil prices help Brazil’s government-controlled petroleum exploration and refining giant Petrobras.
The reason is fuel prices: the government has formulas for gasoline prices are designed to protect the consumer, but are not fully responsive to oil price swings. The international price for crude oil, Brent, is down $1.09 this morning, and is hovering near $84 per barrel — a dive of $30 per barrel over four months and a low not seen since late 2010.
U.S.-traded shares of Petroleo Brasileiro( PBR) are down 7.4% to $15.83 this morning. The stock has been volatile this year, much to do with the presidential election. Petrobras officials have been accused of bribing government officials. But President Dilma Rousseff used the investigation to her advantage, saying she was rooting out corruption. Of late, the odds for investor-favored opposition candidate, Aecio Neves, have been improving.
Morgan Stanley has an equal-weight rating on the U.S.-traded shares and a $17 price target. Here’s what says Morgan Stanley Analyst Bruno Montanari says in a report out today:
“We see lower oil prices into 2015 as a net positive for Petrobras, allowing the company and government to close the fuel price gap with less effort and lower inflation impact. However, it is imperative that Brent regains strength in the LT, as it is the key driver of Petrobras’ exploration and production NAV. … local gasoline import parity gap closing to ~8% from ~23% in the past couple of weeks. In the same period, the diesel gap (which is almost twice as important for Petrobras) also closed to ~5%, from ~15%. Under the current pricing structure, each $5 per barrel reduction in Brent prices would increase EBITDA by ~$390 million and free cash flow by ~150 million … each 10% move in gasoline prices generates 37.5bps of inflationary pressure, while diesel is less relevant at 1.4 basis points. As such, the recent commodity pullback has “saved” 54 basis points in potential inflation impact if we were to consider full pricing parity.”
Here’s Montanari’s punch line:
“assuming PBR becomes a functional oil company (i.e. fuel prices following the commodity), the re-basing of crude at a lower level would have a strong impact in PBR’s upstream NAV. Each $5-per-barrel reduction in long-term prices lowers our upstream NAV by $17.5 billion, or ~$2.7/ADR.”
Morgan Stanley’s commodities team thinks that oil prices may not go much lower because ” much of the last leg of the downside has simply been a result of financial flows, sentiment and macro fears.”
The iShares MSCI Brazil Capped ETF ( EWZ) is down 5.4% today, while the iShares MSCI Emerging Market ETF ( EEM) is down 1.7%. |
