Petrobras: In A Holding Pattern For Now

Taking A Step Back And Gaining Some Perspective After Last Week's Selloff

It’s been an interesting week for several of my portfolio holdings, but Petrobras PBR 0.00%↑ is clearly at the top of the list. A couple people I have talked to have been asking questions, so I figured I would weigh in with my two cents on the company. The TLDR version of my thoughts on Petrobras is “let’s wait and see what happens.” They reported year end earnings last week, and the market was clearly not a fan. Both share classes (PBR and PBR.A) are down a couple bucks since then, primarily due to the lack of an extraordinary dividend announcement. They did declare a regular dividend of $0.44 for Q4, but the market was obviously expecting a cherry on top for 2023 with a special dividend announcement.

Is The Sky Falling For Petrobras?

The short answer is no. If you saw the reaction to Petrobras earnings from some people on social media, their answer is yes. My personal favorite is people who focus on Canadian oil stocks talking about socialism, but I digress. The price of Petrobras shares are all the way back to where it was three months ago. Yes, the government is the largest shareholder. Yes, they will continue to have influence over the company. That’s part of the equation, and why I was talking about overblown political risks last May when Petrobras was way cheaper.

So is the bull case for Petrobras broken if they don’t pay out special dividends moving forward? I don’t think so, but I do think it changes the risk/reward calculation. The media circus surrounding the dividend overshadowed the fact that Petrobras had a fantastic year as far as their operations go. 2022 was a better year due to higher oil prices, but Petrobras is still extremely cheap relative to other oil majors.

2023 Free Cash Flow

Petrobras currently has a market cap of $96.6B. By comparison, Exxon XOM 0.00%↑ and Chevron CVX 0.00%↑ have market caps of $430B and $282B, respectively. Petrobras will probably continue to trade at a discount to other oil majors for a variety of reasons, but I think the valuation gap is too wide. Petrobras also has significantly better margins when compared to the other majors. The other thing worth mentioning is Petrobras’ potential to grow production and their top tier offshore deposits.

I don’t think there’s another oil producer that fits in with the bullish offshore thesis as well as Petrobras. There definitely isn’t another oil major at a similar valuation. With that said, it’s worth getting into recent news on Petrobras to take a look at the discussion around the dividend. Instead of writing an essay to recap some of the news headlines, I’ll just list them out below.

Recent PBR Headlines

• March 8 - Petrobras dividend disappointment sends stock sharply lower

• March 8 - Petrobras plunges as wave of analyst downgrades follows dividend frustration

• March 11 - Brazil president summons Petrobras CEO over dividend crisis - Bloomberg

• March 11 - Petrobras CEO says extra dividend still on the table for April meeting

• March 12 - Petrobras extra dividends will be kept in reserve, two Brazilian ministers say

In short, it’s not exactly a unified front as far as the Petrobras dividend goes. Investors hate uncertainty, and uncertainty is hanging like a cloud over Petrobras right now. Moving forward, it would be great to see coherent messaging from management and the Brazilian government on the capital return policy, but if last week is any indication, that could be a pipe dream. We will see if that changes with the annual meeting, but I’m not going to get my hopes up.

Another recent headline was the addition of Rafael Dubeux to the board, which is not a positive for shareholders in my opinion. I’m not interested in speculating on what is going on behind closed doors related to Petrobras, because it’s hard to guess what’s being said, and even harder to make investment decisions based on what might or might not be going on. It seems like you have Prates, the CEO, leaning towards more shareholder friendly policies on one side, and Finance Minister Fernando Haddad and Energy Minister Alexandre Silveira on the other. I’m sure we will see more headlines out of the company over the next month, but I’m curious to see how the political battle on Petrobras’ board plays out.

The Dividend

Some investors are still expecting a special dividend announcement with the Annual Meeting on April 25th, but we will have to wait and see to be sure. They did announce a regular dividend, which will be paid to investors that own shares as of April 29th. They will be paying $0.22 per ADR on May 28th and $0.22 on June 27th. This is pretty much what I was expecting with current oil prices for the regular dividend. As long as they are paying $0.40 to $0.50 per quarter in dividends, I’m going to have a hard time selling my shares when I’m getting 4-5% of my cost basis returned to me each quarter unless we see a major shift in business strategy or the capital return policy.

Conclusion

Am I frustrated with the lack of clear communication on how management is going to treat investors? Of course, but unless we see them shift their focus from their conventional operations to go build a bunch of windmills and solar panels, I don’t think it breaks the bull case for Petrobras. I’m willing to wait and see what happens at the Annual Meeting. Just like every other Petrobras shareholder, I would love to see them declare a special dividend in April. If it looks like Petrobras is going to be making massive investments in solar and wind, or the government is going to start treating the company like a piggy bank (even more than it already does as the largest shareholder), then I will be selling.

It would be tough to sell when I think we are a long way from fair value even after the run over the last year, but I have other ideas that don’t have the political spice of a South American state owned oil company. I’m planning to wait until the Annual Meeting in April to make any decisions, where one of the main topics is sure to be the company’s dividend policy. The market’s reaction over the last week seems overdone to me, but it’s a situation worth monitoring to see how things progress. I will be keeping a close eye on Petrobras over the next couple months, but I’m in a holding pattern for now.

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Disclaimer

I own shares of PBR.A. Any time I talk about Petrobras shares I am referring to the American Depository Receipts (ADRs). You should do your own research before making any investment decisions. Different investment strategies have different risk/return profiles which should be considered before making any decisions.