Morgan Stanley Stays Overweight On Petrobras, Sees 15% Upside

Morgan Stanley maintained its Overweight rating and raised its price target to $10 on Petroleo Brasileiro SA Petrobras (ADR) PBR following the company's solid second quarter results.

The revised target of $10 implies an upside of 15 percent over Thursday's close of $8.67.

Petrobas' strong refining results, driven by higher oil exports and lower costs were the main drivers of the 6 percent beat to MS EBITDA estimate, along with higher margins on the E&P segment. Normalized EPADR of $0.20 also beat the MS' $0.12 forecast on the back of better operating results and lower depreciation, only partially offset by a higher effective tax rate.

Further, Petrobras generated true positive free cash flow (after debt service) of R$4.8 billion, the highest on record and only the third positive figure since 2008.

"[W]e think new management starts with the right foot improving earnings release quality and transparency," analyst Bruno Montanari wrote in a note.

The analyst's Overweight thesis is based on improved fundamentals and higher long-term oil prices. In addition, the liquidity concerns are abated as it sees debt maturities becoming manageable coupled with good progress on the asset divestment program.

"We acknowledge the recovery path can be a bumpy road and the outcome of the U.S. Class Action needs to be monitored. Still, we find the risk/reward attractive enough to justify the more positive outlook for the stock," Montanari added.