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Petrobras (PBR) Q3 Earnings: Oil Surge to Offset Legal Costs?

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Petróleo Brasileiro S.A. or Petrobras (PBR - Free Report) is set to release third-quarter 2018 results on Nov 6. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at a profit of 35 cents on revenues of $24,510 million.

Notably, the Zacks Consensus Estimate for third-quarter earnings has been revised 39.6% downward over the past 30 days. However, the consensus mark reflects a whopping increase of almost 1066% from the year-ago quarter. Further, revenue estimates for the  quarter to be reportedcompare favourably with the year-ago quarter’s revenues of $22,700 million.

In the preceding three-month period, the Rio de Janeiro-headquartered integrated player delivered a positive earnings surprise of 41.94%. Rising crude prices were primarily responsible for the outperformance, resulting in net quarterly profit of $2,794 million, which is the highest since 2011.

Coming to earnings surprise history, Petrobras is on a firm footing, having surpassed earnings estimates in three of the trailing four quarters, delivering average positive surprise of 10.37%. Investors are keeping their fingers crossed, in expectation of the energy giant beating earnings estimates this time around as well.

Let’s take a look at the factors that are likely to impact Petrobras’ performance in the to-be-reported quarter.

Factors Likely to Influence Upcoming Results

Average West Texas Intermediate (WTI) crude prices were recorded at $70.98, $68.06 and $70.23 per barrel in the month of July, August and September 2018, respectively, per data from the U.S. Energy Information Administration (EIA). These prices were considerably higher than the year-ago respective prices of $46.63, $48.04 and $49.82. Notably, oil prices were fueled by concerns over U.S. sanctions on Iran, OPEC’s efforts to tighten the market and strong global demand.Natural gas prices also fared well, following improving clean energy demand. The average monthly spot prices of the commodity for the respective months of third-quarter 2018 were $2.83, $2.96 and $3.00 per Million Btu, representing healthier prices than third-quarter 2017.Favorable crude pricing environment during third-quarter 2018 is likely to be beneficial for the company’s upstream business.

As it is, we appreciate Petrobras' encouraging portfolio of investments, particularly in Brazil’s pre-salt reservoirs that lie below the Espírito Santo, Campos and Santos basins in deep and ultra-deep water, which are expected to drive production growth of the company. Notably, per its ambitious five-year plans, the Brazilian oil 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.

However, while the company is taking initiatives to trim its leverage metrics, Petrobras is still burdened with a debt of around $74 billion. Also, one can’t deny the fact that its involvement in the Operation Carwash scandal has been a major overhang for the company. In fact, in September, it agreed to pay a fine of $853.2 million to settle charges against it in the Carwash scandal. Notably, its third-quarter 2018 financial statement will incorporate the $853.2 million settlement, which is likely to dent overall earnings. During the quarter, it also lost $622 million in a dispute against Vantage Drilling, which comes as another blow to the company.

While we believe that Petrobras will surely benefit from crude rally, costs related to lawsuits and scandals might limit the company’s profit.

Earnings Whispers

Our proven model does not conclusively show that Petrobras is likely to beat earnings estimates in the to-be-reported quarter, as it has the right combination of two key ingredients. 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 estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings 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 are both pegged at 35 cents.

Zacks Rank: Petrobras currently holds a Zacks Rank #2. Though a Zacks Rank #2 increases the predictive power of ESP, the company’s 0.00% ESP 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

Here are a few firms from the energy space that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat in the quarter to be reported.

Abraxas Petroleum Corporation (AXAS - Free Report) has an Earnings ESP of +3.85% and a Zacks Rank #3. The firm is expected to release third-quarter earnings on Nov 7. You can see the complete list of today’s Zacks #1 Rank stocks here.

CrossAmerica Partners LP (CAPL - Free Report) has an Earnings ESP of +50.00% and carries a Zacks Rank #2. The partnership is anticipated to release quarterly results on Nov 7.

Jagged Peak Energy Inc. (JAG - Free Report) has an Earnings ESP of +8.44% and a Zacks Rank #3. The company is anticipated to release quarterly numbers on Nov 8.

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