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Petrobras (PBR): What Will Q3 Earnings Release Unveil?

PBR CRK FANG LONE

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Brazilian state-run energy giant Petroleo Brasileiro S.A. or Petrobras (PBR - Free Report) is set to release its third-quarter 2016 results on Thursday, Nov 10.

In the preceding three-month period, the Rio de Janeiro-headquartered integrated player delivered a negative earnings surprise of 14.29% due to lower production and weak oil prices.

In terms of earnings surprise history, the company has a dismal record. It underperformed estimates in three of the last four quarters with an average miss of 212.32%.

PETROBRAS-ADR C Price and EPS Surprise

 

PETROBRAS-ADR C Price and EPS Surprise | PETROBRAS-ADR C Quote

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

Unlike the last quarter, where oil advanced more than 26% sequentially to notch up the best quarterly percentage gain in 7 years, the Jun-Sep 2016 period turned out to be a rather flat one with crude barely advancing. In fact, the West Texas Intermediate crude futures during the third quarter hovered around the $45 per barrel mark, flat from the second quarter and down from $46.50 in the same period last year. This does not bode well for Petrobras in general and its upstream unit in particular.

Worryingly, there are signs of weakness in the refining business, suggesting that the unit – which saved Petrobras when crude prices plunged – could now be a drag. The second quarter saw the integrated behemoth’s downstream segment income stay flat year-over-year on decreased economic activity in Brazil along with reduced crude oil export. We expect more of the same in the to-be-reported quarter.

However, production gains present a bright spot for the group. In fact, Petrobras hit a record with output of 2.88 million barrels of oil equivalent per day (BOE/D) in Sep, up 1.4% from the month of Aug.

Petrobras’ successful cost reduction initiatives are also expected to cushion the results.

Earnings Whispers

Our proven model does not conclusively show that Petrobras will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate both stand at 9 cents.

Zacks Rank: Petrobras has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Petrobras, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Lonestar Resources US Inc. (LONE - Free Report) has an Earnings ESP of +16.67% and a Zacks Rank #2. The company is expected to release earnings results on Nov 18. You can see the complete list of today’s Zacks #1 Rank stocks here.

Diamondback Energy Inc. (FANG - Free Report) has an Earnings ESP of +2.86% and a Zacks Rank #2. The company is anticipated to release earnings on Nov 8.

Comstock Resources Inc. (CRK - Free Report) has an Earnings ESP of +0.94% and a Zacks Rank #2. The company is likely to release earnings on Nov 8.

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