Petrobras (PBR) Q4 Earnings Top But Stock Falls: Here's Why

The stock of Brazil's state-run energy giant Petroleo Brasileiro S.A. or Petrobras PBR has lost 11.2% since its fourth-quarter earnings announcement on Feb 25. While the company managed to score a big bottom-line beat on account of rolling back some of its impairment charges, investors were spooked by the fall in production and controversy surrounding the replacement of Petrobras’ chief executive by an army general.

What Did Petrobras’ Earnings Unveil?

Petrobras announced fourth-quarter adjusted profit of 82 cents per ADS, which comprehensively beat the Zacks Consensus Estimate of 6 cents. The favorable comparison primarily stems from the recognition of reversal in impairments to reflect the improvement in Brent crude prices, and a decline in lifting costs.

However, Petrobras’ adjusted EBITDA edged down to $8,811 million from $8,878 million a year ago due to lower average realized oil prices. Meanwhile, the company’s revenues of $13,911 million came in slightly above the Zacks Consensus Estimate of $13,612 million but slumped 30% from the year-earlier sales of $19,868 million.

Petroleo Brasileiro S.A. Petrobras Price, Consensus and EPS Surprise

Petroleo Brasileiro S.A. Petrobras Price, Consensus and EPS Surprise

Petroleo Brasileiro S.A. Petrobras price-consensus-eps-surprise-chart | Petroleo Brasileiro S.A. Petrobras Quote

Coming back to earnings, let's take a deeper look at the recent performances of Petrobras’ two main segments: Upstream (Exploration & Production) and Downstream (or Refining, Transportation and Marketing).

Upstream: This Rio de Janeiro-headquartered company’s average oil and gas production during the fourth quarter reached 2,682 MBOE/d — 80% liquids — down from 3,025 MBOE/d in the same period of 2019.

Compared with the fourth quarter of 2019, Brazilian oil and natural gas production — constituting more than 98% of the overall output — decreased 10.2% to 2,637 MBOE/d. The downside was due to scheduled stoppages at certain prolific field platforms that could not be carried out earlier due to the outbreak of coronavirus.

For the 12 months ended Dec 31, 2020, average production rose 2.4% from the 2019 levels to 2,836 MBOE/d.

In the October to December period, the average sales price of oil in Brazil fell 31.3% from the year-earlier period to $43.29 per barrel. The falling crude prices had a negative effect on upstream segment earnings that was aggravated by lower production.

Overall, the segment’s revenues declined to $8,995 million in the quarter under review from $13,868 million in the year-ago period.

But as far as the bottom line is concerned, a tight leash on pre-salt lifting costs (which fell 11% from the fourth quarter of 2019 to $4.47 per barrel) and a reversal of impairment charge on account of improving Brent prices came to the rescue. In fact, the upstream unit recorded a net income of $6,385 million, up from fourth-quarter 2019 earnings of $3,440 million.

Downstream: Revenues from the segment totaled $12,086 million, down 31.4% from the year-ago figure of $17,606 million. Despite lower sales, Petrobras' downstream unit came up with profit of $976 million, which compared favorably with earnings of $108 million in the fourth quarter of 2019. The surge was on account of higher utilization, lower refining cost and reversal of a loss associated with the Comperj petrochemical complex.

Costs & Expenses

During the period, Petrobras’ sales, general and administrative expenses were $1,207 million, 35.8% lower than the year-ago period. Selling expenses also fell from $1,386 million a year ago to $1,128 million. Moreover, a reverse impairment of $6,019 million meant that total operating expenses fell by $10,791 million from the corresponding quarter last year. This meant that the company reported operating income of $12,960 million in the fourth quarter of 2020 compared with $3,646 million a year ago.

Financial Position

During the three months ended Dec 31, 2020, Petrobras’ capital investments and expenditures totaled $2,049 million compared with $19,839 million in the prior-year quarter (including signing bonus of $16,671 million). In 2020, the company spent $8,057 million.

Importantly, the company generated positive free cash flow for the 23rd consecutive quarter, with the metric marginally rising to $5,683 million from $5,650 million recorded in last year’s corresponding period. For full-year 2020, free cash flow was up 20.1% to $22,074 million.

At the end of 2020, Petrobras had net debt of $63,168 million, less than $78,861 million a year ago and $66,218 million as of Sep 30, 2020. The company ended the year with cash and cash equivalents of $11,725 million.

Meanwhile, Petrobras’ net debt to trailing 12 months adjusted EBITDA ratio improved to 2.22 from 2.41 in the previous year. Moreover, it was better than 2.33 at the end of the third quarter.

Zacks Rank & Stock Picks

Petrobras currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space are Royal Dutch Shell RDS.A, Ovintiv OVV and Pioneer Natural Resources Company PXD. All the companies carry a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Royal Dutch Shell has an expected earnings growth rate of 166.94% for the current year.

Ovintiv has an expected earnings growth rate of 620% for the current year.

Pioneer Natural Resources has an expected earnings growth rate of 364.63% for the current year.

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