Sell Petrobras, Warns Deutsche Bank In Downgrade Analysis

Deutsche Bank’s Alexander Burgansky downgraded the rating for Petroleo Brasileiro SA Petrobras (ADR) PBR from Hold to Sell, while reducing the price target from BRL7.30 to BRL5.10.

The company’s business is likely to be stable, with no significant changes likely to the capex or production outlook or its leverage metrics, without there being a substantial disposal or a change in the oil price. “This is a big improvement on the going concern uncertainty a year ago, with the company’s ability to fund itself no longer in doubt,” analyst Alexander Burgansky wrote.

He added, however, that the company may post negative net income in both 2016 and 2017, squashing any hopes of dividends.

Needs Oil Price Support To Deleverage

Burgansky estimated that Petrobras would need new funding of $7bn in 2016 and of $12bn in 2017. The company’s Net Debt/EBITDA ratio could decline to 4.9-5.0 by the end of 2016, and further deleveraging would require oil price to be more than $50 per barrel from 2017.

Dividends Threat From Hedge Accounting

“The impact of hedge accounting becomes material in 2016, as giant unrealized forex loss ($20bn after-tax) starts to get recycled through P&L,” the analyst commented.

Petrobras had indicated that it could recycle pre-tax losses of $3.7bn in 2016 and $4.4bn in 2017 through its income statement. This would “almost entirely offset our estimated “clean” PBT of $3.7bn in 2017 and $4.8bn in 2018,” the Deutsche Bank report pointed out. With resulting expectations of net losses in 2016 and 2017, dividend may be delayed until 2018 for prefs and until 2021 for ords.