Petrobras Gets Another Bearish Recommendation On Wall Street

• Petroleo Brasileiro SA - Petrobras (ADR) PBR shares have lost 47 percent year-to-date, and are trading close to the lower-end of their 52-week range of $3.72 - $17.64.
• Macquarie’s Giacomo Romeo initiated coverage of the company with an Underperform rating and a price target of $2.80.
• Romeo believes that the company would need to come up with a new plan to fund its growth.

The current business plan being implemented by Petrobras is based on certain macro assumptions, including oil price and exchange rate. Analyst Giacomo Romeo believes that these assumptions appear outdated and overly dependent on the company’s ability to execute an ambitious $58bn divestment / restructuring plan.

From the time Petrobras announced this plan, S&P has downgraded its debt rating to BB for the company, while Moody’s was already valuing Petrobras as sub-investment grade. “Over the last 3 months, Petrobras’ yield curve has increased ~500bps, a move that could cost the company ~$15bn in higher interest during the next four years,” Romeo wrote.

In the report Macquarie noted, “Under our base case, we estimate that Petrobras’ investment plan generates a US$79bn funding gap to 2020.” This funding requirement appears to be too large to be absorbed by debt capital markets and will compel the company to make further capex cuts.

Romeo added, however, that most of the near-term capex relates to contracted production units, which leaves limited scope for more cuts over the next five years.

“We estimate that delaying uncommitted capex might provide $15-25bn of relief. If this is not sufficient, PBR might have to seek more radical liquidity measures that could potentially include a debt restructuring and / or an equity issue,” Romeo stated.