Petrobras Shares Underperform Despite JP Morgan Upgrade

ADRs of Petroleo Brasileiro SA Petrobras (ADR)
have underperformed despite an upgrade from JPMorgan. JPMorgan has upgraded the stock to Neutral from Underweight on potential for lower credit risk, asset sales momentum, favorable regulatory environment and foreign exchange gains. "We estimate PBR's refinancing needs will decrease ~$4.7bn in 2017 to ~$6.1bn from $10.8bn with the $6.7bn debt exchange offer while the leftover value of $1.9bn should be used to amortize '18/19 debt," analyst Felipe Dos Santos wrote in a note. The company would benefit from ongoing asset sale plan targeting at least about $5 billion - $6 billion in additional transactions by 2016, which is backed-up by a $10 billion term-sheet buffer loan. "According to our forecasts, if PBR achieves a $5bn asset sale, our NAV would increase by $0.7/ADR and this would reduce our Net Debt/EBITDA by 0.2x in '16 (non-producing asset) ," Santos highlighted. Meanwhile, the analyst said a 5 percent appreciation in our BRL/USD base case increases his 2016 EBITDA estimate to $24.3 billion or +6 percent (+$1.4 billion). On the other hand, a $+10/bbl increase in Brent prices decreases EBITDA by 1 percent (about $0.3 billion), without changing diesel/gasoline prices. "We expect PBR to continue selling diesel and gasoline at a premium to import parity despite the combination of FX rates and Brent price," the analyst continued. "All in all, after incorporating some of these positives, we see PBR's '16/17 debt requirements as more balanced and this should enable the company to take a breath before facing significant debt payments of ~$12/17bn in '18/19," Santos added. At the time of writing, ADRs of Petrobas have dropped 0.08 percent to $6.14. The analyst has raised the price target to $7 from $5.5.
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