25%-Yielding Petroleo Brasileiro Stock Up 190%+ Since 2021
September 14, 2023
Why PBR Stock’s Trading at Highest Level Since 2011
Fears of a potential recession in 2023 hurt crude oil prices earlier this year, with West Texas Intermediate oil falling to a low of $63.57 per barrel in April.
But thanks to record-high demand and consumption, production cuts from Organization of the Petroleum Exporting Countries Plus (OPEC+), and the fears of a recession waning, crude oil prices have been surging, recently hitting more than $88.00 per barrel.
This bullish sentiment has been helping send the share price of Petroleo Brasileiro (NYSE:PBR), also known as Petrobras, significantly higher.
Headquartered in Rio De Janeiro, Petrobras is a state-run, multinational company that specializes in oil, natural gas, and other aspects of the energy industry. (Source: “Profile,” Petroleo Brasileiro, last accessed September 11, 2023.)
The company is engaged in prospecting, drilling, refining, processing, trading, and transporting crude oil from onshore and offshore oil fields. It’s particularly known for its oil and gas exploration and production in ultra-deep waters.
The company’s operations include 12 refineries, 5,042 oil and gas wells, and proven reserves of 9.9 billion barrels of oil equivalent. It churns out 2.8 million barrels of oil equivalent per day. Of that amount, 1.9 million barrels are crude oil.
Petroleo Brasileiro also has 123 owned and chartered vessels in its shipping fleet, 7,719 km (4,796 miles) of oil pipelines, and 9,190 km (5,710 miles) of gas pipelines.
With the decline of the internal combustion engine and the expected pullback in oil demand, Petrobras has been taking steps to decarbonize its operations. It owns three biodiesel plants, 15 thermoelectric plants, and one photovoltaic solar plant.
A growing number of countries, 128 at last count, are working toward net-zero carbon emissions by 2050. These countries are currently responsible for 88% of the global emissions and 92% of the world’s gross domestic product (GDP). On top of that, 43 of the world’s leading international banks might limit the capital that they make available to the oil and gas industry.
Petroleo Brasileiro Reported Q2 Earnings Beat
Petrobras reported second-quarter revenues of $22.9 billion, down from $34.9 billion in the same period last year. Its gross profit came in at $11.6 billion, versus $19.4 billion in the second quarter of 2022. (Source: “Financial Performance: 2Q23,” Petroleo Brasileiro, August 3, 2023)
The company’s second-quarter consolidated net income was $5.8 billion, compared to $11.0 billion in the same period a year earlier. Its earnings per share (EPS) were $0.85, which was $0.10 better than the consensus analyst call. The company’s recurring net income, excluding one-time items, came in at $5.8 billion, compared to $9.1 billion in the second quarter a year earlier.
The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell to $11.4 billion in the second quarter from $19.9 billion in the same period a year ago.
Management blamed the 19% drop in adjusted EBITDA on international diesel crack spreads, which fell by more than 40% quarter-over-quarter. A crack spread is the difference between the purchase price of crude oil and the selling price of the finished products.
Petroleo Brasileiro’s cash flow from operations remained strong in the second quarter at $9.6 billion. Its year-to-date (first six months of the year) free cash flow (FCF) was $14.6 billion.
The company’s refining utilization rate in the second quarter was 93%, its highest level since the third quarter of 2015. Diesel, gasoline, and jet fuel production represented 67% of the total. Petrobras also reported a sales record for diesel and its highest year-to-date gasoline sales in six years.
Why did an energy giant like Petroleo Brasileiro have lower second-quarter earnings? The company actually performed similarly to its peers, who also reported a big drop in second-quarter profits.
Oil prices are currently robust, but they weren’t earlier in the year. Global oil prices were down in the second quarter compared to the same period a year earlier. That was while a regional banking crisis in the U.S. and fears about a possible recession raised concerns about demand.
It’s been a different story in the third quarter, with global oil demand hitting a record-high 103 million barrels per day in June. The August numbers were set to be even higher. (Source: “Oil Market Report – August 22023,” International Energy Agency, last accessed September 11, 2023.)
One of the world’s biggest oil-consuming countries has been helping with those numbers. In August, China imported the third-highest monthly crude oil volumes, up by 20.9% from July and 30.9% from August of last year. (Source: “China’s August Oil Imports Surge to the Third-Highest Level Ever,” OilPrice.com, September 7, 2023.)
Management Declared Q3 Dividend of $0.235
Petrobras recently announced a new dividend policy that cuts its payments to 45% of the company’s free cash flow but allows for share buybacks. (Source: “Shareholder Remuneration Policy,” Petroleo Brasileiro, July 28, 2023.)
Before the reduction, it distributed as much as 60% of its operational cash flow (when its gross debt was below $65.0 billion).
The company will continue to pay minimum total dividends of $4.0 billion per year as long as Brent oil prices are above $40.00 per barrel. Right now, Brent crude is trading at $90.00 per barrel.
Petroleo Brasileiro’s new dividend policy will see the company pay dividends that are in line with those of its peers. The updated policy means investors will be able to rely on more predictable dividends, as opposed to payouts that fluctuate drastically from quarter to quarter.
Higher oil prices and asset sales have allowed Petrobras to provide exceptionally frothy quarterly payouts. In 2022, the company paid more in dividends than every oil company except Saudi Arabian Oil Co. (Source: “Petrobras Cuts Dividends After Political Outcry and Lower Prices” BNN Bloomberg, August 3, 2023.)
As a state-run company, Petroleo Brasileiro was criticized by Brazil’s president, Luiz Inacio Lula da Silva, for spending too much money on dividends while neglecting to spend more capital on refining and the energy transition. (Source: “Lula Bashes Petrobras Dividends, Says Firm Invested ‘Almost Nothing’,” Reuters, March 2, 2023.)
Da Silva said Petrobras should have invested half of its annual dividends in Brazil’s economic growth, including the country’s naval and oil and gas industries.
Under CEO Jean-Paul Prates, Petroleo Brasileiro unveiled a new five-year business plan that will see it maintain a similar capital expenditure program as that of the previous CEO. Prates said the company’s business plan will focus on renewable energy and its offshore oil exploration portfolio.
To that end, Petroleo Brasileiro announced a third-quarter dividend of $0.235 per share, for a current yield of about 25%. That payout is 39% lower than the $0.382 payout of the second quarter but is higher than what investors thought they might get under the new management and dividend policy.
Petroleo Brasileiro Stock Up 11% Year-Over-Year
Oil prices have been volatile over the last few years, with the Brent and West Texas Intermediate oil prices tumbling during the COVID-19 pandemic and experiencing periods of volatility while they recover.
PBR stock’s price, on the other hand, has been moving steadily higher since the broader market bottomed in March 2020. Petroleo Brasileiro stock has also moved significantly higher since the company unveiled its new dividend policy and capital expenditure program.
As of this writing, PBR stock is up by:
- 11% over the last month
- 15.6% over the last three months
- 54% over the last six months
- 57% year-to-date
- 36.5% year-over-year
Chart courtesy of StockCharts.com
The Lowdown on Petroleo Brasileiro
Petroleo Brasileiro is an oil and gas giant with a solid balance sheet, reliable cash flow, and a recently improved dividend policy.
Petroleo Brasileiro stock’s distributions won’t be as massive as they were in 2022, but the payouts will be more reliable, sustainable, and in keeping with the big dividends that the company’s peers are paying.
Dividend hogs may wince at the idea of a reduced payout, but investors are on board, sending this dividend stock to its highest share prices since 2011. That said, any surplus cash that the company has could be used to pay a special dividend, which management will look at closer to the end of the year.
