Petrobras' Cash Flow Still Challenging, Morgan Stanley Says

In a report published Thursday, Morgan Stanley analyst Bruno Montanari commented on

's fourth quarter 2014 results which proved to be a "non-event." Montanari noted that contrary to the prior guidance of neutral free cash flow to firm (FCFF) generation, the new management guidance calls for negative free cash flow to firm of $6 billion and negative free cash flow to equity (FCFE) of $9 billion. This represents almost no improvement from the -$8.3 billion FCFF the company reported in 2014. Montanari said the biggest surprise was the still very high capital expenditure level of $29 billion and a low divestment target of $3 billion out of the two-year $13.7 billion plan. Petrobras also reiterated its 2,125Kbbl/d oil production target for 2015 (4.5 percent year-over-year increase) while also introducing a "meager" 2.8 percent growth outlook for 2016 of 2,185Kbbl/d. The analyst noted that with a two-year capex budget of $54 billion, the market may have been expecting a 2016 production growth in the 7 percent to 9 percent range. "Lower production growth makes it more difficult for Petrobras to achieve an organic deleveraging process," Montanari wrote. "We continue to think that the inclusion of an equity offering in the plans is the only definitive measure to fix the capital structure." Finally, Montanari stated that Petrobras suspension of dividend is a positive from a cash preservation perspective but some investors may expect a dividend payment for preferred shares, regardless of the fact that the company reported a net loss last year. Petrobras expects to file its first quarter 2015 results on May 15 and issue a new five-year business within the next 30 days. Shares remain Equal-weight with no assigned price target.