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Petrobras (PBR) Stock Up on Debt Cut Since Q1 Earnings Miss

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The stock of Brazil's state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Free Report) has gained around 17% since its first-quarter earnings announcement on Apr 27. While the company missed top and bottom-line estimates, investors were encouraged by its steep debt reduction and turnaround from the year-ago loss.

What Did Petrobras’ Earnings Unveil?

Petrobras announced first-quarter earnings per ADS of 3 cents, missing the Zacks Consensus Estimate of 26 cents. The unfavorably comparison primarily stems from lower production and a slight increase in pre-salt lifting costs.

However, the bottom line improved markedly from the year-ago loss of 10 cents on the back of higher oil prices, strong downstream results, favorable currency effects and the absence of impairments.

Recurring net income, which strips one-time items, came in at $231 million against a loss of $732 million a year earlier. Petrobras’ adjusted EBITDA rose to $8,906 million from $8,581 million a year ago.

Petrobras, which left its market-based fuel pricing policy unchanged, reported revenues of $15,698 million that undershot the Zacks Consensus Estimate of $17,333 and fell from the year-earlier sales of $17,143 million.

Coming back to earnings, let's take a deeper look at the recent performances of Petrobras’ two main segments: Upstream (Exploration & Production) and Downstream (or Refining, Transportation and Marketing).
 

Upstream: The Rio de Janeiro-headquartered company’s average oil and gas production during the first quarter reached 2,765 thousand barrels of oil equivalent per day (MBOE/d) — 79% liquids — down from 2,909 MBOE/d in the same period of 2020. Compared with the year-ago quarter, Brazilian oil and natural gas production — constituting 98% of the overall output — decreased 4.8% to 2,720 MBOE/d. The deterioration was due to the lesser number of production units in operation.

In the January to March period, the average sales price of oil in Brazil rose 14.7% from the year-earlier period to $57.32 per barrel. The increase in crude prices had a positive effect on upstream segment earnings, which were partly offset by lower production.

Overall, the segment’s revenues improved to $11,666 million in the quarter under review from $10,877 million in the year-ago period. As far as the bottom line is concerned, despite a slight uptick in pre-salt lifting costs (which rose 2.4% from the first quarter of 2020 to $4.63 per barrel), the upstream unit recorded a net income of $3,925 million against the first-quarter 2020 loss of $5,804 million

Downstream: Revenues from the segment totaled $13,973 million, lower than the year-ago figure of $15,480 million due to a dip in export volumes. However, Petrobras' downstream income of $1,255 million turned around from the year-ago loss of $702 million, primarily due to favorable inventory turnover effects plus lower operating expenses.

Costs

During the period, Petrobras’ sales, general and administrative expenses totaled $1,221 million, down 30.1% from the year-ago period. Selling expenses also declined from $1,335 million to $948 million. Consequently, total operating expenses fell sharply to $2,032 million from $15,691 million in the year-ago period. This meant that the company reported an operating income of $5,975 million against a loss of $8,427 million in the first quarter of 2020.

Financial PositionDuring the three months ended Mar 31, 2021, Petrobras’ capital investments and expenditures totaled $1,913 million, compared with $2,433 million in the prior-year quarter.

Importantly, the company generated positive free cash flow for the 24th consecutive quarter, with the metric coming at $5,592 million, slightly down from $5,911 million recorded in last year’s corresponding period.

At the end of the first quarter, Petrobras had a net debt of $58,424 million, decreasing from $73,131 million a year ago and $63,168 million as of Dec 31, 2020. The company ended the quarter with cash and cash equivalents of $11,964 million.

Meanwhile, Petrobras’ net debt to trailing 12 months EBITDA ratio improved to 2.03 from 2.15 in the previous year.

Zacks Rank & Stock Pick

Petrobras currently carries a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Apart from Petrobras, investors interested in the energy sector might look at Suncor Energy (SU - Free Report) , Imperial Oil Limited (IMO - Free Report) and PDC Energy (PDCE - Free Report) . These companies also sport a Zacks Rank of 1.

Suncor Energy has an expected earnings growth rate of 248.18% for the current year.

Imperial Oil has an expected earnings growth rate of 347.56% for the current year.

PDC Energy has an expected earnings growth rate of 106.40% for the current year.

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