Boosted by higher oil prices, major international oil companies closed the second quarter of 2021 with financial statements in full recovery. A survey by Valor Data shows that all the companies that make up the group of the so-called Big Oil – ExxonMobil, BP, Shell, Chevron, Total and Eni – showed significant improvement in their financial indicators, but that none of them profited more than Petrobras. Close to its debt reduction target, the Brazilian state-run company stands out as one of the best dividend payers among its peers.
Adding the results of all Big Oil companies plus Petrobras, the accumulated profit in the second quarter was $29.1 billion, reversing a combined loss of $26.6 billion. Petrobras alone reported a gain of $8.1 billion.
This recovery has a simple reason: the increase in the price of oil. The average Brent barrel, a global benchmark, more than doubled compared to the second quarter of 2020, peak of the global demand contraction during the pandemic. Between April and June this year, the barrel was traded at an average of $68.8, an increase of 135% compared to the same period last year.
Together, the seven companies analyzed had revenues of $281.3 billion, double the result of the second quarter of 2020, even though most oil companies had drops in production in the period.
The oil companies are also demonstrating other solid financial indicators, such as earnings before interest, taxes, depreciation and amortization (Ebitda) and expanding free cash flows – which have allowed companies, increasingly pressured by investors averse to fossil fuels, seek ways to increase shareholder remuneration.
After reporting strong second-quarter earnings, some companies took the opportunity to announce share buyback programs, such as BP ($1.4 billion), Chevron ($2 billion to $3 billion a year) and Shell ($2 billion), in addition to dividends.
Petrobras is going in the same direction and emerges as a major payer of resources to investors. By announcing last week that it will anticipate R$31.6 billion ($6 billion) to shareholders in the fiscal year of 2021 –almost triple the average in the three previous years – the Brazilian state-owned company will deliver a dividend yield of 9%, according to UBS BB. The number places the company in the first quartile among the 21 oil companies monitored by the bank, with the indicator only lower than the Russian companies Gazprom (13%) and Lukoil (12%).
UBS predicts that Petrobras will distribute another $15 billion next year and that, in 2022 and 2023, the company’s dividend yield could reach 14%, the highest in the sector. The optimism with Petrobras’ dividend yield is shared by Safra, which also sees the state-owned company’s indicator reach double digits in 2022.
The dividend yield is a ratio between the dividends paid by a company in a given period and the individual share price. The indicator measures the company’s performance according to the earnings paid to shareholders. Petrobras’ good positioning among international peers, in this case, is due not only to the expectations of an increase in dividends but also to the fact that the Brazilian company shares are less valued than of the giants in the sector.
The belief that Petrobras will pay more dividends in the coming years is partly anchored in divestments. With a leaner asset portfolio, the oil company currently consumes less cash with investments and operating expenses in lower-yielding assets.
The increase in dividends also reflects the intense work of deleveraging the company in recent years, after a financial crisis in 2014 amid the drop in oil prices and Petrobras’ involvement in the corruption scandal known as Car Wash Operation. The asset sale program and strong cash generation in recent years allowed the company to cut debt.
The state-run company ended the second quarter with a gross debt of $63.7 billion, close to the target of $60 billion, initially set for 2022 but now anticipated for this year. The target works as a trigger for the new shareholder remuneration formula, which provides for the distribution of 60% of the difference between operating cash flow and investments.
Although Petrobras’ numbers are still high, it is undeniable that the Brazilian company has advanced in debt management. Since 2014, when it had one of the largest corporate debts in the world, Petrobras cut its net debt practically in half, to R$54.3 billion.
The state-owned company’s leverage, measured by the ratio between net debt and Ebitda, dropped to 1.49 times, the lowest level in ten years.
Along with the high returns, however, the investment thesis at Petrobras is accompanied by high risks. This is the analysis of Credit Suisse, which, in a recent report highlighted that, close to reaching the goal of reducing gross debt to $60 billion, the company can now distribute all free cash generated in the coming quarters. This means that Petrobras may have, in addition to the $ 6 billion distribution announced last week, another $4 billion more to pay in 2021.
However, according to Credit, there are “significant risks on the horizon,” although they are outweighed by a combination of a heavily discounted valuation and high dividend returns. The Swiss bank cites the 2022 presidential elections and potential government intervention in pricing policy, in addition to the risks associated with an increase in the volume of investments — an element that directly competes with dividends, within a company’s capital allocation strategy. In Credit’s assessment, it may be difficult for the oil company’s management to resist pressure to increase capital expenditures, especially at a time when the state-owned company has high free cash generation and falling debt.
In the bank’s assessment, the increase in investments is not necessarily bad, but the risk is that additional capital could be allocated to projects with lower returns. Credit forecasts an increase in investment in Petrobras’ next business plan, by $2 billion in 2022 and $4 billion starting in 2023, compared to the previous plan.
Last week, commenting on the results for the second quarter, Petrobras’ CFO Rodrigo Araújo said that the company may increase the volume of investments in its next business plan (2022-2026), although “substantial growth” is not expected”. The current business plan foresees investments of $55 billion between 2021 and 2025, of which 84% are directed to oil and gas exploration and production projects with a focus, although not exclusively, on deepwater drilling.
Source: Valor international