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Petrobras Seen as Buy by Goldman Sachs Despite Recent Rally
Goldman Sachs Upgrades Petrobras to Buy with Attractive Valuation and Diminished Risks
Despite the recent rally of Petrobras, Goldman Sachs has upgraded the Brazilian petroleum company to a buy. Bruno Amorim, an analyst from Goldman Sachs, stated that the stock is still attractive with valuation at around 15% of free cash flow in 2024 to 2025. Moreover, he revealed that the recent rally reflects greater visibility on what will be the new management's approach on fuel pricing policy and capital allocation for the current cycle. His price target of $18.10 implies an upside of 27.2% over Tuesday's close.
Petrobras Mitigated Tail Risks Following New Clarifications on Policies from the Government
Petrobras management has already mentioned the possibility of buybacks and a new dividend policy is expected by the end of July, according to Bruno Amorim. Meanwhile, the company has mitigated tail risks following new clarifications on policies from the government, which holds a stake in the company. Capital expenditures tied to low carbon initiatives are expected to increase to between 6% and 15% of the total from 6% currently. Amorim also noted the potential for Petrobras to take a controlling stake in Braskem and acquire Vibra back after the fuel distribution business went private in 2019.
New Pricing Policy for Fuel Follows International Price Trends and Limits the Risk of Heavy Subsidies on the Fuel Industry
Although the new pricing policy for fuel is considered convoluted, Amorim said that the company should still follow international price trends. And there could be a delay or small discount compared with international prices. The new policy can also potentially limit the risk of heavy subsidies on the fuel industry weighing on profitability. Petrobras also focuses on the upstream segment, refining, and renewable energy, outside of low carbon initiatives.
Petrobras’ Stock Shows Positive Gains in 2021
Petrobras’ stock has shown a positive gain in 2021, with 33.6% so far, outperforming the broader market. Although visibility still remains limited, the positive announcements at least partially reduce the possibility of an eventual worst-case scenario that was expected by some investors. Despite this recent rally, Petrobras still has an attractive valuation. By comparison, global majors are in the mid-to-high single digits when looking at the percentage of free cash flow with similar assumptions for oil prices.
In light of Goldman Sachs' recent upgrade of Petrobras to Buy, new businesses should consider the implications of this news for the energy sector. The upgrades reflect greater visibility on Petrobras' management approach on fuel pricing policy and capital allocation for the current cycle. The company's mitigated tail risks following new clarifications on policies from the government highlight the importance of understanding political and regulatory risks when starting new businesses. Capital expenditures tied to low carbon initiatives are expected to increase to between 6% and 15%, which emphasizes the shift in demand towards renewable sources and clean energy. On the other hand, the new pricing policy for fuel follows international price trends and limits the risk of heavy subsidies on the fuel industry weighing on profitability, which may increase the profitability of traditional energy sources. These developments can impact new businesses in the energy sector, and depending on their strategy and plans, can represent an opportunity or a challenge. It is essential to consider market and political trends in the energy sector in the long term, and be willing to be agile and pivot as necessary.