After the Brazilian election, political discounts deepened, and Morocco is still bullish. Petrobras (PBR.US) focuses on fuel pricing and dividends
The Zhitong Finance App learned that after Petrobras (PBR.US) released its latest quarterly report, Wall Street financial giant Morgan Stanley still maintained the most optimistic rating of “increase in holdings,” but lowered its target price from 31 US dollars to 25 US dollars at the end of 2027, a decrease of 19.4%. Damo's forecast for Brazilian crude oil production in 2027 is still 2.86 million b/d, and the adjusted EBITDA forecast was only revised down by about 0.4%. What has changed more is free cash flow after deducting lease payments, and the valuation multiples the market is willing to pay for these cash flows. According to the closing price of $18.28 quoted in the report, $25 implied 36.76% upside. Based on the latest closing price of $17.82 in the US East on November 11, the implied increase was 40.29%.
Petrobras (Brazilian National Petroleum Company, hereinafter referred to as Petrobras) is a listed petroleum company controlled by the Brazilian federal government. The Brazilian federal government holds approximately 50.26% of the common share voting power and has control. The company's American Depositary Receipts (ADR) are also traded on the New York Stock Exchange. The stock trading codes for the US stock market are PBR and PBR.A.
After Lula's re-election, as of November 11, Petrobras's US stocks have fallen by more than 30% compared to the pre-election period. Morgan Stanley maintained its 2027 crude oil production forecast and only slightly lowered profit expectations. However, under Wall Street's latest valuation model, the valuation discount of Brazilian oil compared to international oil giants was further expanded from 30% to 40%, and the target price of Damo was reduced from 31 US dollars to 25 US dollars, but it still highlights the strong bullish stance of the Dama analyst team on Brazilian National Petrobras. The key factors in the next market transaction are how diesel subsidies and gasoline pricing affect refining payments, and how much cash from increased production can be used for dividends after deducting capital expenses and lease payments.
Production set a record, and the market first repriced dividends and capital expenses
On November 11, Petrobras common stock ADR fell 2.52%, while Brazil's listed common stock PETR3 and preferred stock PETR4 fell 2.09% and 3.11%, respectively. On the same day, the Brent crude oil contract for January rebounded about 1.4% to 92.76 US dollars/barrel. Taking time back to the general election, PBR closed at $26.16 before the October 23 election. It fell 13.99% to $22.50 on the first trading day after the election, and had a cumulative retracement of 31.88% on November 11. The divergence in the financial report shows that the company's unique dividends, investment expenses, and policy expectations are affecting pricing.
Third-quarter results increased year over year, and profit and distribution fell short of market expectations. In real terms, net profit to mother was about R$39.8 billion, up 21.5% year over year, and about 15% lower than LSEG's agreed estimate of 47 billion yuan. The adjusted EBITDA was R$85.8 billion, up 34.3% year over year, and about 8.7% lower than the forecast of $94 billion.
The company's US dollar statement showed revenue of US$32.962 billion, up 40.4% year on year and down 1.9% month on month. Operating cash flow was US$12.026 billion, up 22.0% year on year and down 1.8% month on month. Free cash flow was US$6.618 billion, up 33.2% year over year and down 13.6% month over month. The board of directors approved the allocation of R$15.3 billion to shareholders for the third quarter, which is approximately R $1.1873 per local common share or preferred share.
Upstream growth was realized by the Yanxia Oilfield, while downstream was constrained by fuel pricing and cash repayments. The company's equity oil and gas production reached 3,511 million barrels of oil equivalent per day, up 11.7% year on year and 5.3% month on month. The cost of under-salt mining operations is about 4.48 US dollars/barrel of oil equivalent, reflecting the quality of assets. After leasing and production taxes, the mining cost for the Brazilian business is approximately $23.36 per barrel of oil equivalent. The refinery utilization rate reached 99%, and diesel production reached a record of 769,000 b/d.
Additionally, new upstream floating production storage and offloading units (FPSO) may be delivered ahead of schedule, and existing platforms release production capacity through reservoir management and equipment modifications. As a result, the company raised its annual equity oil and gas production guide from 3.1 million to 3.3 million to 3.4 million barrels of oil equivalent per day, and raised its cash investment guide from 16.9 billion to 21 billion to 22 billion US dollars, and the operating cash flow guideline from 35 billion to 45 billion to 50 billion US dollars. Increased production increases future returns, and also means that drilling, subsea access, and platform support expenses will occur earlier.
Diesel has subsidies, gasoline evaluations, or extensions. How do political discounts go into cash flow?
The increase in the company's earnings call is that diesel and gasoline may use different evaluation rhythms. Management believes that diesel is expected to meet the current pricing strategy before the end of the year, and that the gasoline evaluation period may be extended to 2027, which is still being studied. The company maintains the current framework and is also evaluating phased adjustments. The direction and timing of price adjustments have not yet been given. The framework's two pricing references are the customer's alternative procurement costs and Petrobras's own marginal opportunity value. The former covers imports, other suppliers, and alternative fuels, while the latter depends on the economy of self-refining, import, and export uses. Diesel import costs are also affected by cracking price differences, exchange rates, and freight rates for refined oil products, so domestic diesel price differences may continue to exist after Brent falls back down.
For shareholders, the impact of the policy falls on refinery sales prices, export repayment, and subsidy payment time, respectively. The basic subsidy for road diesel is R$2.12 per litre. Eligible importers have been able to add additional allowances for a short period of time. At this stage, gasoline is mainly reducing terminal prices through federal tax cuts, and the relief has been extended until December 9.
Brazil also extended the 12% export tax on crude oil until the end of the year. In the third quarter, subsidy receivables and export-related inventory have taken up working capital. The time difference between the receipt of the subsidy and the receipt of cash will affect the current free cash flow and ability to distribute it. Brazil relies on imports for more than a quarter of domestic diesel consumption, which also makes it necessary for the government to balance terminal prices with the importers' willingness to replenish supplies.
Lula won his fourth presidential term with 51.79% of the vote on October 25, and the next administration still needs to coordinate with the more conservative National Assembly. The Brazilian federal government holds 50.26% of Petrobras's common share voting capital, so minority shareholders include fuel security, inflation management, and investment priorities in the valuation.
Earlier, on January 4, the Bank of Brazil maintained the Selic interest rate at 13.75%, ending continuous interest rate cuts. On November 11, the government proposed a plan to improve the fiscal budget by up to 60 billion reais in 2027, which is still to be advanced. These variables influence investors' judgment on the stability of the company's cash allocations, and also explain why Damo expanded valuation discounts when upstream predictions were stable.
Morgan Stanley assumes that from 2026 to 2028, the average annual price of Brent crude oil will drop from $94 to $85 per barrel and then to $70. Over the same period, Petrobras crude oil production in Brazil is expected to increase from 2.756 million barrels to 2.86 million barrels and 2.984 million barrels per day. Under the assumption that oil prices fall year by year and production continues to grow, the company's adjusted EBITDA is expected to rise from US$67.08 billion in 2026 to US$69.341 billion in 2027, and then fall back to US$59.757 billion in 2028.
Both cash flow and shareholder allocations are expected to reach their highest levels in these three years in 2027. Damo estimates that from 2026 to 2028, free cash flow before deducting lease payments will be $23.491 billion, $39.114 billion, and $28.623 billion, respectively, and $12.307 billion, $26.375 billion, and $15.298 billion after deduction, respectively. Shareholder allocations for each American Depositary Receipt (ADR) are expected to be $1.78, 3.14, and $2.38, respectively, for the same period. Among them, free cash flow after deducting lease payments is expected to increase by about 114% year over year in 2027, while adjusted EBITDA will only increase by about 3.5%. There is a big difference in growth between the two. One key reason is that Damo expects working capital to shift from net occupation to net release.
2027 is still the highest cash flow point in the Damo model, but lease payment revisions have weakened the ability to distribute this year. Damo raised its average annual lease payment assumption up to 2030 from $11.4 billion to $12.5 billion, reflecting additional maintenance and emergency support devices and contract revisions and renewals. As a result, free cash flow after deducting leases in 2027, along with other model adjustments, fell from $29.181 billion to $26.375 billion. The forecast for each ADR distribution fell from 3.26 to $3.14, corresponding to a static gross distribution yield of about 17.6% at a stock price of $17.82. One key assumption that the model still anticipates a year-on-year doubling of free cash flow after rent in 2027 is a shift in working capital from a net occupation of $10.142 billion in 2026 to a net release of $4.674 billion in 2027.
Meanwhile, exploration and production EBITDA is expected to increase from $51,586 billion to US$61,456 billion, while refining and marketing EBITDA falls from US$20.997 billion to US$9,932 billion. Increased upstream production supports profits, and the recovery of working capital determines how quickly profits can be converted into cash. The company's quarterly distribution policy uses its own defined free cash flow caliber and is distributed at 45% under applicable conditions.
The main driver of the target price reduction is the valuation multiplier. Daimo switched to forward-looking enterprise value/EBITDA (EV/EBITDA) valuations to increase the 5.0-fold benchmark discount of international oil giants from 30% to 40%, resulting in a target multiple of 3.0 times. Based on the 2027 EBITDA of US$69.371 billion used in the valuation table, after deducting net debt and minority shareholders' equity, and adding back the book value of the investment, the corresponding group equity value is approximately US$161 billion. The difference between the EBITDA used in the valuation table and the profit forecast statement was US$30 million. According to the latest closing price, the optimistic/benchmark/pessimistic scenario was $33/25/14, corresponding to +85.19%/+40.29%/− 21.44%, respectively.
This also means that as Wall Street agencies agreed to expand Brazilian oil's discount compared to international giants after the Brazilian election, in terms of forward-looking corporate value multiples (EV/EBITDA) peer discounts, Damo used the 5.0 times valuation of international oil giants as a reference, and discounted Brazil's valuation by 40%. Specifically, for every dollar, the 2027 EBITDA is predicted. The interbank benchmark corresponds to a corporate value of 5 US dollars, and Damo's equivalent to Brazilian oil is 3 dollars. The original 30% discount was 5.0 × 70% = 3.5 times; now the 40% discount corresponds to 5.0 × 60% = 3.0 times.
The optimistic scenario presented by Damo relies on fuel prices being close to parity and capital expenditure being controlled. The pessimistic scenario included refining and chemical profits falling to break-even, potential tax expenses, and delays in upstream projects. The five-year strategic plan of November 23 will provide the next opportunity for verification, focusing on how much of the increased investment is in advance of the project, how much lease payments will increase, and when new production will be converted into distributable cash.