Bank Of America Upgrades Petrobras, Says Return To Financial Health Likely

Improving oil prices mean a "major change" to the investment profile of Brazil-based Petroleo Brasil/ADR PBR, according to Bank of America Merrill Lynch.

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The Analyst

BofA's Frank McGaan upgraded Petrobras rating from Neutral to Buy with a price target lifted from $26 to $35.

The Thesis

Simply put, expectations for an ongoing "healthy oil price environment" over the next few years support the upside case for Petrobras' stock, McGaan said in a Thursday note. (See the analyst's track record here.)

The petroleum company's net debt/net capital ratio should fall below the 40-percent mark within two years, even if management doesn't realize any new proceeds from asset, the analyst said. If asset sales continue, the overall risk profile of the company will "improve even more quickly," he said. 

These factors will erase a "major concern" for Petrobas, as its debt levels will become "manageable" within one to two years, McGaan said. The company also faces a catalyst in a favorable settlement of its Transfer of Rights re-valuation, although this is "not critical," he said. 

Investors should also keep in mind four key risks for Petrobas, McGaan said:

• Overall volatility in all emerging markets, including Brazil.
• Financial risks related to legal challenges and investigations.
• Risks to the bullish thesis if oil prices start falling.
• Potential volatility ahead of Brazil's October presidential election.

Price Action

Petrobas shares were rallying 7.4 percent near the end of Thursday's trading session. 

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Photo by Agencia Brasil via Wikimedia.