Petrobras (NYSE: PBR) is a partially public Brazilian multinational corporation with a market of almost $70 billion making it one of the larger oil companies the world. On top of this size, Petrobras has impressive future potential. The combination of recovering oil prices combined with the company's impressive assets makes the company, as we will see, an impressive investment at the present time.
Petrobras, as the primary oil company of Brazil, is headquartered in the capital of Brazil, Rio de Janeiro. The company is a semi-public company that produces several million barrels per day of oil and is one of the 100 largest companies in the most recent Fortune Global 500 list. The company's enormous size and importance to Brazil means that the company is directly related to most oil asset development in Brazil.
Petrobras has had a difficult time since the start of the mid-2014 oil crash. A combination of a difficult oil environment along with a difficult environment in Brazil means that Petrobras' stock price peaked in 2008 at more than $70 per share. From then, the company's stock price dropped to a mid-2014 peak of just under $20 per share before the start of the oil crash.
From that mid-2014 peak in oil prices, the combination of a difficult oil environment has resulted in Petrobras' stock price dropping even faster. The company's stock price dropped by almost 90% from its mid-2014 peak to a January 2016 low of just over $3 per share. Since then, the company's stock price has recovered to just over $10 per share. Even with this recovery, the company's stock price is still noticeably below its pre-crash highs and has a lot of room for improvement.
Petrobras Where We Are
Now that we have an overview of Petrobras along with a discussion of the company's recent stock price performance, let's discuss where Petrobras is in the present market.
Petrobras currently has to deal with a changing, uncertain global economy. Oil prices are widely viewed to have bottomed in early-2016 when they hit less than $30 per barrel. From that point, oil prices have almost doubled, showing the increased strength of the oil markets. However, even with this recovery, oil prices are still noticeably below their pre-crash highs.
At the same time, the competitive nature of the oil markets are changing. The recent crash was not caused by increased production from OPEC, but it was instead caused by a rapid growth in oil production from American shale. Shale oil is cheap to get online and also cheap to get offline. As a result, should prices continue to rise, it is likely shale oil will begin to come back online slowing down production.
Petrobras has had to deal not only with a difficult oil environment and shale production, but the company has also had to deal with a difficult environment in Brazil. The company undertook expansion by taking out massive amounts of debt meaning the company has had significant interest expenses. At the same time, a challenging regulatory framework in Brazil will make the company's operations harder.
Petrobras Growing Debt - Petrobras Investor Presentation
At the same time, Petrobras has had to deal with an incredibly difficult financial situation. The company has an immense $124 billion of debt, but has seen its operating cash generation that averaged $20 billion or more per year from 2006 to 2015 drop to $11 billion in 1H of 2016. However, this does show how Petrobras has continued to generate large amounts of cash in a very difficult oil environment.
As we can see, Petrobras took advantage of the growing oil markets and a low interest rate to rapidly increase its debt The company's net debt to EBITDA ratio increased from 0.4 in 2006 to 5.3 in 2015, after a decade. However, Petrobras has been actively reducing its debt. The company cut its debt load by $8 billion from 2015 to 2016 decrease its net debt / EBITDA ratio to 4.5.
This shows how the company has been making strong investments.
Petrobras Where We Want To Be
Now that we have an overview of Petrobras' recent stock price performance along with a discussion of where the company is right now. This includes the increasing impact of shale oil along with the difficult regulatory environment the company is in. This also includes Petrobras' rapidly growing debt load in the face of constant cash generation. Now that we have discussed all of this, let's continue by discussing where Petrobras wants to be.
Petrobras Dream - Petrobras Investor Presentation
Petrobras' dream is to become an integrated energy company that is focused on oil and gas. This involves creating a high value society, an organization, with unique assets and a unique technical capability. Petrobras is primary oil company for Brazil, a country, which as we will see later has enormous oil assets. That means that the company has significant growth potential as it carries out its dream.
Petrobras Future Changes - Petrobras Investor Presentation
Petrobras plans on doing this by increasing both its safety profile and its financials. From 2015 to 2018, the company plans to decrease its total recordable injury frequency rate from 2.2 to 1.4. Injuries, while rare, have the ability to cost the company millions if not billions of dollars, especially of they are part of an organization like the Deepwater Horizon Spill. As a result, improving safety helps Petrobras' long-term earnings.
At the same time, Petrobras understands the difficult financial position it is in. The company plans on reducing its net debt to EBITDA ratio from 5.3 in 2015 to 2.5 in 2018. That means the company plans on reducing $10s of billions from its debt load using its cash flow in the coming years. By doing this, Petrobras will significantly reduce its interest expenses helping its earnings and long-term potential.
Petrobras Production Growth - Petrobras Investor Presentation
Petrobras plans to undertake this growth and debt reductions by increasing the efficiency of its operations. The company anticipates total production to grow from 2.62 million barrels per day in 2017 to 3.41 million barrels per day by 2012, an astounding growth of more than 30%. This should bring Petrobras tens of billions in additional annual revenue and billions in additional annual income.
This will help the company's long-term earnings. And this shows how Petrobras is focused on getting to where it wants to be and working towards that goal. And this helps to show how Petrobras plans to get there.
Petrobras Company Of Brazil
So far, we have discussed Petrobras recent stock price performance in detail. At the same time, we have discussed where Petrobras is presently along with the growing importance of shale and the company's high debt load. However, we have also discussed where Petrobras wants to be by discussing the company's plan to be an integrated oil company while increasing its debt load rapidly. Now let's finish by talking about the potential of the environment Petrobras is in.
Petrobras is the main oil company of Brazil which has some very significant and oil and natural gas reserves. Most importantly, the country has an astounding almost 30 billion barrels of oil reserves. As we saw above, Petrobras is looking to produce almost 3.5 million barrels per day in oil production or 1.3 billion barrels per year. This means the country has access to an astounding 23 years of reserves.
This shows the potential of the market that Petrobras has access to and the company's future potential.
Petrobras has had a difficult time since the start of the oil crash. Not even then, but the company saw its stock price drop significantly from the 2008 to 2014 period as a result of the difficult market environment in Brazil. Despite this, Petrobras understands the situation it is with its significant debt load of more than $100 billion and the growing importance of shale in the markets.
Petrobras, as the oil company for Brazil, a company with almost 30 billion barrels in oil reserves, has significant growth potential. The company plans to grow its production by more than 30% over the next several coming years increasing its cash flow significantly. This will allow the company to get its debt load to EBITDA ratio cut in more than half. And this will decrease Petrobras' interest expenses while helping the company's future earnings.
And this shows why Petrobras is a strong investment at the present time.
Disclosure: I am/we are long PBR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.