Petrobras (New York Stock Exchange: PBR) is the public Brazilian oil company with a market capitalization of nearly $90 billion. The company recently announced a bumper $17 billion dividend following its best quarter ever. As we see it throughout this quarter, Petrobras remains incredibly undervalued and can generate substantial returns.

Financial performance of Petrobras in the 2nd quarter of 2022

Petrobras delivered incredibly strong financial performance throughout the quarter.

Petrobras Financial Performance – Petrobras Investor Presentation

Petrobras generated a monthly production record and continued to explore new assets. Brazil continues to ramp up production as new assets continue to be found and Petrobras is the center of it. The company generated massive recurring EBITDA of $20.2 billion and FCF of $12.8 billion, which translates to an annualized FCF return of over 60%.

The company approved a massive $17 billion dividend, posting a yield of almost 20%. The company’s gross debt of almost $54 billion is very manageable for the company (less than 5 quarters FCF). We would like to see the company aggressively repurchase its debt to save on the billions in interest payments, especially in a growing indebtedness environment.

Petrobras Outdoor Market Environment

Supporting Petrobras is the incredibly strong external market in which the company operates.

Petrobras Outdoor Market – Presentation to Petrobras Investors

The company saw average prices throughout the quarter of $114/bbl of Brent. The first half of 2022 for the company was $108/barrel, just over 1% below current prices of $110/barrel. We don’t expect prices to stay at $114+ forever, however, we do expect the company to be able to comfortably sustain over $100 a barrel through 2022.

Its low costs and substantial time in a low price environment means the company is poised to generate massive profits at current prices. From a financial point of view, the company is benefiting from the weakening of the Brazilian R$/USD$ which is lowering its operating costs. However, the current is still stronger than a year ago.

Financial positioning of Petrobras

Petrobras is well positioned financially, however, we believe it can improve. We expect political uncertainty and the company’s unpopularity at a time of high prices on the home front to push it to use its capital for dividends.

Petrobras has steadily reduced its gross and net debt from previous levels. In 2019, before the COVID-19-induced oil crash, those numbers were $79 billion and $87 billion, respectively. Since then, with the last quarter, the company has reduced those numbers to $34.4 billion and $53.6 billion respectively. In a few more quarters, he can bring those numbers down to 0.

The company’s annual debt is manageable and the company continues to have a minimum of cash. If anything else, in a world of rising interest rates, we’d like the company to pay off its debt when it’s due rather than rolling it over.

Petrobras Asset Base

The company’s impressive asset base supports future returns for Petrobras shareholders.

Petrobras Asset Base – Petrobras Investor Presentation

The company’s operated production fell 3% quarter-on-quarter, while its commercial production fell 5% quarter-on-quarter. The company’s pre-salt production specifically fell by 4%, but this impressive low-cost output now accounts for the lion’s share of the company’s overall output. The company’s production share here continues to be around 73%.

Among the company’s growing assets are its Buzios assets. The company achieved a production share of 92% with record production of over 600,000 barrels/day. The company is targeting more than 2 million barrels/day in production by the end of the decade from a rapidly expanding development in Buzios. It’ll cost $10 billion, but it’s comfortably affordable.

The company had a slightly higher lifting cost due to more maintenance, however, its total cost per barrel produced was $42/barrel. It should also be noted that $20/barrel represented taxes, which means that in the worst case, the company’s costs are only $22/barrel.

Petrobras Shareholder Awards

Putting it all together, Petrobras has the ability to generate substantial shareholder rewards.

The company earned $12 billion in 2Q 2022 FCF versus $8 billion in 1Q 2022. This means an annualized FCF of $40 billion at $108/barrel Brent, nearly half of the company’s market capitalization. company, below current prices. The company announced a dividend yield of $17 billion or around 20%, and it has the cash to generate shareholder rewards through many avenues outside of that.

We would like to see the company continue to reduce its debt to save on the several billions in annual interest. The company has only considered small buyouts, however, we’d like to see a buyout in the $10 billion range. This would provide the Brazilian government with additional cash from the shareholder return on its 64% stake.

Thesis risk

The biggest risk to the thesis is the price of oil. Excluding taxes, Petrobras has a lifting cost of around $22/barrel. Oil prices have fallen below this level below, however, we don’t see them as sustainable at this level obviously. We view the company as one of the most profitable companies above $100 a barrel and expect it to continue to perform well at higher prices.

Conclusion

Petrobras is back on the radar after announcing a record $17 billion dividend. We expect this to be based on the company’s desire to retain favor with a Brazilian government seeing price discontent among the population. However, regardless, the company continues to perform well and we expect that to continue.

The company has the ability to continue paying substantial dividends and investing in its future. It has a strong integrated portfolio and its asset development in Buzios continues to have substantial growth potential. Overall, given this potential, we recommend investing in Petrobras for the long term by taking advantage of its opportunity.