July 25, 2014, 10:32 A.M. ET
Petrobras: Better After October Election, Barclays Ups To Buy
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By Shuli Ren
REUTERS
According to Barclays, the outlook for Brazilian energy giant Petrobras (PBR) will be better once the October election is over, regardless of who wins. The bank upgraded Petrobras from Hold to Buy with a price target of $22 for PBR and $23 for PBR-A (preferred share).
Shares of Petrobras have risen by about two-thirds since mid-March when the market started to rumor that President Dilma Rousseff may be vulnerable as she sought re-election (Rousseff is still a front runner). Despite its valuable assets, Petrobras operates in the red because its controlling shareholder – the Brazilian government – mandates it to sell gas to consumers at loss to control inflation. Recently, the government struck a deal to swap assets for cash with Petrobras even though some of its board members were not notified of the mega deal and analysts across the board said the idea was a terrible one.
But once the election is over, Petrobras will get some breathing room because the next president won’t have to deal with voter discontent till 2017. Here are Barclays analysts Paul Y. Cheng, Anthony Kit and Ingrid Su:
We believe Petrobras is at an inflection point and will see near- to medium-term positive momentum following the upcoming Brazilian presidential elections in October 2014. After realizing several years of significant losses in the R&M segment, we believe there is a window of 12-24 months after the election that the next Administration could allow Petrobras to raise domestic product prices without risking too much political capital (the next election cycle will not heat up until late 2017). Assuming the incumbent remains in power, we think the first product price increase could come as early as November/December 2014. Assuming another candidate wins, the first increase could come as early as 1Q15. In any case, we think the government’s objective is to control inflation and stimulate GDP growth by creating a sound business environment for Petrobras to operate in. Without sufficient cash generation, Petrobras will be unable to invest heavily back into the economy.
Barclays estimates that Petrobras currently trades at about 40% discount to its net asset value, assuming oil price is at $100 per barrel. The bank believes the discount “could shrink to 20% or so over the next 12-18 months. We estimate the company’s breakup value should still exceed $25/ADS even assigning zero value to its domestic refining operations.”
Petrobras is up 0.4% this morning trading at $17.13.