Petrobras: Chasing ~20% Dividend Yields Despite The Geopolitical Risks (NYSE:PBR) - Seeking Alpha

Petrobras: Chasing ~20% Dividend Yields Despite The Geopolitical Risks (NYSE:PBR) | Seeking Alpha

Petrobras: Chasing ~20% Dividend Yields Despite The Geopolitical Risks
Petróleo Brasileiro S.A. - Petrobras (PBR)

CVX,

OXY,
XOM 13 Comments

Summary

- PBR's income investment thesis remains attractive, due to its low break-even cost and higher Brent oil spot prices.
- The management has also guided stellar shareholder returns over the next few years, for so long that Brent remains above $40s.
- The company's stock is trading with a geopolitical discount compared to its US-based oil/gas peers, despite the optimistic FY2023 FCF projections.
- Due to its compressed stock prices, PBR offers an excellent forward dividend yield, made further attractive by the doubled dividend payout due to the ADR ratio.

turk_stock_photographer/iStock via Getty Images

PBR's Income Investment Thesis Is Still Highly Attractive Here

We have previously covered Petrobras(NYSE: PBR) in April 2023, recommending income investors to lock in quick short-term gains through the stock's stellar dividend yields. At that time, it appeared that the Brent oil prices might remain well-supported at between $80s and $90s, due to the OPEC+ cuts, banking crisis, lean SPR reserves, and China's reopening oil demand.

The Collapse In Brent Prices

Insider

Well, it seems that we have been overly optimistic then, since Brent oil spot prices continue to moderate to $76.26, down by -10.2% since April 2023, despite the imbalance in global oil supply and demand. It appears that the OPEC+ and Saudi Arabia's production cuts have been non-events, with the US government continuing to draw down its SPR reserves to 351.68M barrels by June 09, 2023 (-2.8% MoM/ -31.2% YoY).

Then again, we believe things may improve from here, since the Kuwait Petroleum Corporation guides robust oil demand from China in H2'23, as highlighted by the CEO, Sheikh Nawaf Saud al-Sabah:

We see that from (...) our customers in China, our largest customer for KPC for crude oil, those customers continue to demand at least similar amounts of crude if not more and it is a harbinger, if you will, of continued good demand. (
Reuters)

The same data is reflected in the country's oil refinery throughput, which increased by +15.4% YoY in May 2023, recording its second-highest total. The OPEC+ also expects the country's demand to grow by 840K barrels to 15.7M barrels per day (+5.3% YoY), with oil prices to be further supported by the total production cuts of 3.66M barrels per day through 2024.

Combined with the SPY bull run since October 2022 and an increased likelihood of the Fed pivoting by 2024, we may see the global demand for oil recover faster than expected.

PBR 1Y Market Cap/FCF

S&P Capital IQ

In addition, PBR has been overly moderated compared to its US-based oil/gas peers, thanks to the geopolitical discount. For example, the former only trades at NTM Market Cap/FCF of 3.88x, against Exxon Mobil Corporation ( XOM) at 10.89x, Chevron ( CVX) at 10.11x, and Occidental Petroleum Corporation ( OXY) at 8.29x.

The discount in PBR's valuations is evident indeed, despite market analysts' optimistic FY2023 FCF projection of $23.99B (-43.2% YoY) against XOM at $38.72B (-33.7% YoY), CVX at $25.57B (-28% YoY), and OXY at $6.33B (-48.6% YoY).

PBR Lower Break-Even Cost

PBR

Most importantly, due to PBR's lower break-even cost of $35 per barrel and the current Brent prices of $76.26 per barrel, the pessimism embedded in its stock valuations is unwarranted, in our opinion, due to the positive impact on its FCF generation.

Particularly, the management has highlighted its ability to pay out a minimum of $4B in annual dividends whenever the average Brent price is above $40 per barrel.

The recent windfall has also allowed PBR to deleverage tremendously, from FY2019 long-term debt levels of 58.95B to $25.8B by the latest quarter.

Assuming a similar cadence, we may also see the health of its balance sheet improve from current levels, despite the sustained capex initiatives worth $99B through FY2027, both of which are highly accretive to the sustainability of its business operations.

PBR Projection Of Brent Prices Through 2027

PBR

The PBR management also projects that the Brent prices will only normalize to the pre-pandemic levels of $65 per barrel by 2027, suggesting that the company will be able to sustain its handsome payouts indeed.

For example, the company paid out $4.3B in dividends for FQ1'23 (+7.7% QoQ), bringing the approximate quarterly dividend per ADR to $0.70, since the NYSE ADR comprises two Brazilian shares.

This cadence suggests PBR's compelling annualized dividend per ADR of $2.80 and a forward dividend yield of 20.1%, compared to XOM at 3.46%, CVX at 3.84%, and OXY at 1.24%.

So, Is PBR Stock A Buy, Sell, Or Hold?

PBR 2Y Stock Price

TradingView

Thanks to the geopolitical risks embedded in PBR's valuations, income investors may continue to load up at these levels, despite the recent recovery in its stock prices.

As occumsdevotee highlighted in my previous article, with $100K of capital, one may buy 7.19K ADRs based on its current share prices of $13.90. Assuming a sustained dividend policy, the return may be as handsome as $20.13K in dividends for the next four quarters, or 1.44K of new shares if one so chooses to drip.

Naturally, it remains to be seen if PBR may sustain its current execution and dividend payout, since the country's geopolitical risks remain a major concern, with the company's leadership constantly changing at the same time. Therefore, while we may rate the stock as a Buy here, it is only suitable for income investors who are comfortable with moderate volatility and risk.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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