Morgan Stanley Downgrades Petrobras On 'Tough Road' Ahead

In a report published Monday, analysts at Morgan Stanley downgrade

to Underweight. The price target is set to $8.50. The analysts expect 15 percent downside to the stock, following the 100 percent rally since the end of March. While the announcement of the audited financials removed a big overhang on the stock, the analysts believe that the downside is likely to be driven by the negative cash flows the company is likely to witness during 2015-2018, as well as the disproportionate debt levels. "Default overhang is behind us, but capital structure deficiency is a key concern and valuation is not attractive. Debt acceleration is no longer a threat and Petrobras is regaining access to debt markets," the analysts explained. However, the company's fundamentals do not appear supporting of the cash burn expected over the next four years, given that investments are likely to outpace operating cash generation by an average of $ 6 billion. Therefore, Morgan Stanley expects the company to "continue to focus its business plan on servicing debt holders to the detriment of equity holders." While accelerating divestments and cutting capex could drive deleveraging, these measure are likely to prove insufficient to rectify the balance sheet. These measures are more focused on avoiding a debt spiral in the near term. In addition, the production growth targets are lackluster at present. "We continue to think that an equity issuance could be beneficial for Petrobras to regain scope for investment," the analysts added.