Wall Street Is Warming Up To Petrobras

Brazil stocks are on fire Monday after the nation’s the first round of presidential elections, and one Wall Street analyst has taken the opportunity to upgrade Brazil’s PETROLEO BRASIL/ADR PBR, also known simply as Petrobas.

The Analyst

JPMorgan analyst Rodolfo Angele upgraded Petrobas from Neutral to Overweight and raised his price target from $14 to $17.

The upgrade comes on the same day Bank of America upgraded Petrobras Brasileiro from Neutral to Buy and raised its price target from 30BRL to 35BRL.

The Thesis

According to Angele, the Petrobas risk/reward balance is favorably skewed for investors for several reasons:

The stock is valued at just 3.4 times EV/EBITDA, well below the 5.0 times multiple of its peer group.
Petrobas is set to grow its production volume by 14 percent in 2019 and another 10 percent in 2020.
Oil prices have risen to their highest levels since 2014.
Jair Bolsonaro’s victory in the preliminary Brazilian elections indicates the potential for less political risk for Brazilian companies like Petrobas.

Petrobas is commissioning eight floating production storage and offloading units in 2018 and 2019, and five of those FPSOs are in the Buzios Field.

“The oil produced from this area, in our opinion, will have the best economics of all volumes produced by PBR as under this regime, the company only pays a 15% royalty rate and there is no special participation tax,” Angele said in a note.

He said production growth will likely continue to be a bullish catalyst for Petrobas over the next several years. In addition, JPMorgan raised its 2019 crude oil price forecast from $70/bbl to $80/bbl.