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Petrobras analysts see key risk erased after $9 billion deal

Dado Galdieri/Bloomberg

Bank of America Merrill Lynch, JPMorgan, Bradesco BBI, Itau BBA and Santander maintained their overweight/outperform/buy recommendations.

By Vinicius Andrade / Bloomberg

Petroleumworld 04 12 2019

An agreement between Brazil's oil giant Petroleo Brasileiro SA and the government has ended a five-year dispute and eliminated one of the main uncertainties surrounding its investment case, analysts said.

JPMorgan increased its price target for the company's American depositary receipts to $21.50 from $20, and the bank expects Petrobras to use “a good portion” of the $9.06 billion settlement to fund its own participation in a deep-water oil auction set for Oct. 28.

Read more: Brazil to Pay Petrobras $9 Billion in Oil Contract Settlement

“We see the reinvestment of such proceeds in these areas as accretive for Petrobras,” analyst Rodolfo Angele wrote in an April 9 report. “It will add additional volumes for the company in an area that the company has de-risked, knows very well, and that has solid economics.”

Bank of America Merrill Lynch, JPMorgan, Bradesco BBI, Itau BBA and Santander maintained their overweight/outperform/buy recommendations.

According to Itau BBA, investors should now keep their eyes on the surplus auction in October and the subsequent reimbursement for investments Petrobras has already made in the area. “We expect the focus to shift to the reimbursement figure and how it will effectively be carried out in the months leading up to the bidding round,” Andre Hachem wrote in a note.

Here's what Wall Street analysts have to say:

Bank of America Merrill Lynch, Frank McGann, Joao Lorenzi

  • Deal was above BofAML's estimate of $5-$7 billion
    • Assuming no tax effects in the transaction, the gross value to shareholders would be $1.39/ADR
  • Despite the lack of full information on the final revaluation, BofAML sees the conclusion of negotiation as positive for Petrobras
    • “It effectively eliminates an important uncertainty that has been present since the 2010 awarding of the ToR”
  • Buy rating maintained

Bradesco BBI, Vicente Falanga

  • Announcement is positive for Petrobras
  • Amount was slightly above what Bradesco BBI had in its valuation model
  • Process is finally advancing to the final stages
  • Outperform rating reiterated

BTG Pactual, Thiago Duarte

  • Settlement was 10% below BTG estimates, "but we still can't see it as a bad thing”
  • ”The settlement comes as a positive simply by removing a potential judicial overhang risk”
  • ”It remains unclear to us when and, equally-important, how the government will pay Petrobras”
  • Reiterates Petrobras as a Top Pick

Itau BBA, Andre Hachem

  • Settlement isn't reflected in Itau BBA's estimates; it adds approximately 2.6 reais/share to Itau BBA's 2019 year-end fair value
  • Itau BBA expects investor focus to now shift to the surplus auction and the subsequent reimbursement
  • Outperform rating maintained

JPMorgan, Rodolfo Angele

  • Confirmation of the “sizable” $9 billion payment is certainly positive news
    • “It settles years of lengthy negotiations with the government, brings in a cash injection to the company and allows the government to proceed with the auction for the excess barrels”
  • JPMorgan expects Petrobras to use a good portion of this cash to fund its own participation in the auction for the excess barrels
  • The amount to be paid to Petrobras by the winner(s) of the auction might become more relevant
  • Price target raised to $21.50 from $20
  • Overweight rating maintained

Santander, Christian Audi

  • Value came within Santander's expectations and conclusion of negotiations will enable the company to participate in future auctions
  • “This brings an important, positive end to what had become a prolonged negotiation process that was continually monitored by the markets”
  • Petrobras reiterated as Santander's top pick in the Latin American oil and gas sector

What Bloomberg Intelligence Says

A $9.06 billion cash infusion that Petrobras will get to settle a deepwater contract dispute with the Brazilian government provides another boost to the oil company's ability to meet debt and leverage targets. Some of the positive news may already be reflected in Petrobras' debt and equity securities, but the payment could further support their recent impressive performance.

- Jaimin Patel, credit analyst
Click here to read the research


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