HSBC Upgrades Petrobras, But Warns Of 'Challenging Execution'

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In a report published Tuesday, HSBC analyst Luiz Carvalho upgraded the rating on
Petroleo Brasileiro Petrobras SA (ADR)
PBR
from Reduce to Hold, while raising the price target from BRL9 to BRL15. Petrobas outlined its 2015-2019 business plan that included a $58 billion divestment plan and fuels import parity. "Despite the positive message from the release, we believe that execution is likely to be very challenging, but we are now giving the company the benefit of the doubt, as we believe the potential positive impact from the two assumptions above could be very significant," analyst Luiz Carvalho mentioned. "Import parity could bring an additional USD7bn in cash generation, while the planned divestments represent nearly 100% of current market cap, which seems to be aggressive, in our view," Carvalho added. Petrobras's shares are currently trading at a 12 percent premium to its global peers. The company's production growth has, however, come at a much higher cost and lower return. In the report HSBC noted, "…average annual capex of USD25bn for the 2017-2019 period is very close to company maintenance capex of USD18-25bn." The company revised its domestic oil production guidance to 2.8 Mboe, down from the previously guided 4.2 Mboe. The new guidance seems achievable in view of the expected delays on the FPSO deliveries, the report mentioned.
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Posted In: Analyst ColorUpgradesPrice TargetAnalyst RatingsHSBC
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