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Here's Why You Should Invest in Petrobras (PBR) Right Now

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With rising activities in Brazil’s pre-salt reservoirs, Petróleo Brasileiro S.A. or Petrobras (PBR - Free Report) appears to be a lucrative pick for the energy stock investors. The company’s prospects are bright and it seems like the time is right for you to add the stock to your portfolio.

Petrobras currently has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or #2 (Buy) offer the best investment opportunities for investors.

Here are the reasons why the Rio de Janeiro-based state-run energy company is an attractive investment option now.

Pre-Salt Positioning

Considering Brazil's huge pre-salt oil reserves — estimated at 9.5-14 billion barrels of oil equivalent and widely thought to be the most important oil find in the recent years — Petrobras is in an enviable position to maintain an impressive production growth profile for years to come. The company operates in the pre-salt reservoirs that lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water. Petrobras is the operator in most of these exploration areas, holding interests ranging from 20-100%.

Rising Production

Per its ambitious five-year plans, the Brazilian energy giant intends to boost average production from an expected 2.7 million barrels of oil equivalent per day (Boe/d) in 2018 to 3.55 million Boe/d by 2022. The plan will be supported by the eight platforms going into production in 2018 and 11 more coming online by 2022. Notably, the company met its production target for the past three years.

Regaining Financial Health

Following a corruption scandal, the Latin-American energy company’s credit metrics were scarred and it turned into the world's most-indebted oil company. Since then, the company has come a long way to significantly reduce its debt burden. The measures taken by Petrobras allowed it to trim its massive leverage. At the end of June 2018, the company had net debt of $73,662 million, decreasing from $84,871 million at 2017-end and $96,381 million as of Dec 31, 2016. It has laid strong emphasis on debt reduction in its recent five-year Business Management Plan (2018-2022) to strengthen its credit rating.

Surging Free Cash Flow

Petrobras’ free cash flow (FCF) from operations has increased rapidly in the past few years. Following the trend, even in the first half of 2018, the company generated free cash flows of $8,546 million, up 19% year over year as a result of operational improvement.

Robust Earnings History:

Petrobras announced second-quarter earnings per ADS of 44 cents, surpassing the Zacks Consensus Estimate of 31 cents and the year-ago profit of 2 cents. Rising crude prices were primarily responsible for the outperformance. The company beat the Zacks Consensus Estimate in three of the trailing four quarters, delivering an average positive earnings surprise of 10.4%.

Positive Earnings Estimate Revisions

Analysts believe the positive trend shown so far by Petrobras will continue in the coming quarters as well. Over the past 60 days, three analysts have upwardly revised earnings estimates for the third quarter of 2018, while none have decreased the same for Petrobras. The Zacks Consensus Estimate for the current quarter has been revised upward from 43 cents per share to 58 cents, which is significantly higher than year-ago quarter’s figure of 3 cents. Moreover, for full-year 2018, the bottom line is expected to surge 130% to $1.61.

Impressive Industry Outlook:

The industry, to which Petrobras belongs, currently has a Zacks Industry Rank of 59 out of 256 (top 23%). Studies have shown that 50% of a stock's price movement is directly tied to the performance of the industry group that it belongs to. In fact, an average stock in a strong group is likely to outperform a great stock in a poor industry. Therefore, taking industry performance into account becomes a necessary measure.

Price Performance

While the company’s 14.3% gain in the past year is lower than the 32.4% growth of its industry, Petrobrasstock is expected to show strong upward momentum in the future. The mix of robust fundamentals and a discounted valuation is expected to offer decent upside potential to investors.

In terms of EV/EBITDA ratio – which is one of the best multiples for valuing oil and gas companies because the energy firms have a large amount of debt – Petrobras seems undervalued. The company currently has an average trailing 12-month EV/EBITDA ratio of 4.5, which is below the industry average of 6.3.

Other Stocks to Consider

Investors interested in the energy sector can also opt for other top-ranked stocks like McDermott International, Inc. (MDR - Free Report) , Subsea 7 S.A. (SUBCY - Free Report) and Helix Energy Solutions Group, Inc. (HLX - Free Report) , each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based McDermott is an equipment provider for energy companies. The company’s top line for 2018 is likely to improve 145% year over year. In the last four reported quarters, the company delivered an average positive earnings surprise of 101.7%.

Luxembourg-based Subsea is an oilfield service providing company. In the last four reported quarters, the company delivered an average positive earnings surprise of 318.6%.

Houston, TX-based Helix Energy’s bottom line surpassed the consensus mark in three of the last four quarters, with the average positive earnings surprise being 66.7%.

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