Analysts revise recommendations, price targets as political risks fall
Petrobras’s new pricing policy and board’s moderate profile reduce analysts’ pessimism — Foto: Rich Press/Bloomberg
Petrobras shares are back on analysts’ radar with the reduction of political risks for the company. The new policy on fuel prices, less interventionist than expected, and the more moderate board of directors have reversed the pessimism over the stock after the elections.
Now, six banks have a buy recommendation for Petrobras shares, according to an analysis by Valor. Other nine maintain a neutral recommendation and one suggests selling it. Two of the buy recommendations came last week.
At the beginning of May, when there were still doubts about the direction of Petrobras’s pricing policy and dividends, there were four buy recommendations, 11 neutral recommendations, and one sell recommendation.
The change in sentiment came after Petrobras announced its new fuel pricing policy. The oil company dropped the link to import parity prices and replaced it with a formula that takes into account the customer’s alternative costs and the marginal value to the company.
There was a consensus among analysts that the changes were negative because they meant a departure from international parity as the primary method of pricing. But, at the same time, fears of more direct state intervention in the sector did not materialize.
Recent remarks by Petrobras’s new executives to the press and in meetings with banks have also contributed to this change in sentiment around the stock and the “benefit of the doubt” that the market has given to CEO Jean Paul Prates to implement changes in the coming months.
J.P. Morgan and Morgan Stanley, two of the largest U.S. banks covering Petrobras, raised their recommendations for the company’s American Depositary Receipts (ADRs) traded on the New York Stock Exchange (NYSE) to buy from neutral given a scenario of reduced risks around the stock.
The two banks had price targets at the bottom of Valor’s survey, J.P. Morgan at $11.50 and Morgan Stanley at $12.50, reflecting a more cautious view of the company’s future. The prices have since risen to $15.50 and $16.50, respectively.
J.P. Morgan analysts Rodolfo Angele, Milene Clifford Carvalho, and Henrique Cunha wrote that the market perception now is that Petrobras’s new board is not expected to make drastic changes in its strategy, contrary to pessimistic post-election expectations.
They note that Petrobras is expected to increase investments in low-carbon projects, but the focus remains on pre-salt and deepwater, while the new dividend policy is likely to follow the example of what happened with the fuel rules – there could be occasional changes without fundamentally changing concepts.
“So far the policy changes have been less drastic than the market feared and the appreciation of the real has contributed to the defensive nature of the stock,” say analysts Bruno Montanari and Thiago Casqueiro, from Morgan Stanley.
The bank believes that dividend payouts will remain robust throughout the year, in line with the yields of international peers, as the company needs to manage the cash flow, which also benefits its main shareholder – the Brazilian state.
BB Investimentos, which already had a buy recommendation, lowered its price target for the common and preferred shares to R$36 from R$43 earlier this month, maintaining a positive view of the company’s operating performance and optimism about changes in strategies.
Analyst Daniel Cobucci said Petrobras faces some short-term challenges, such as the review of its strategic plan and the expectation of changes in dividend policy, as well as other long-term ones, such as the replenishment of reserves and investments in the energy transition.
“We understand that the direction of the new plan, as we have mentioned in other opportunities, is in line with other global oil companies that have increased their portfolio diversification with the entry into low carbon footprint segments,” Ms. Cobucci said.
Analysts from BB Investimentos, J.P. Morgan, and Morgan Stanley agree that Petrobras shares are traded at a discount, either compared to historical levels of the company itself or other companies in the sector, which justifies a buy recommendation, with investors looking at the company’s fundamentals.
Goldman Sachs maintained a more cautious stance, with a neutral recommendation, adjusting the price target on ADRs to $13 from $12.50, below even the current price levels in the American stock exchange, expecting the shares to continue to move more on news than on operations.
The analysts Bruno Amorim, João Frizo, and Guilherme Costa Martins say that Petrobras is likely to continue to present robust results in the second quarter, in line with market expectations, but they want to see how the new dividend policy, which is expected to be published in July, will affect the distribution of the period.
UBS BB, which downgraded its recommendation on Petrobras shares to sell from buy a few days after the presidential elections, reiterated the position but raised its target price for common and preferred shares to R$22 from R$20 at the end of May.
“We note that changes at Petrobras take time due to governance and the size of the company, but we were positively surprised by the recent progress, which turned out to be less negative than we expected,” analysts Luiz Carvalho, Matheus Enfeldt, and Tasso Vasconcellos wrote in a report.
However, like Goldman Sachs, the investment bank remains cautious until the new dividend policy is in place. In addition, they are skeptical about the effectiveness of fuel pricing in case oil reverses its trend and starts to rise.
*Por Felipe Laurence — São Paulo
Source: Valor International