Petrobras: We Shouldn't Be Unnerved By The Overblown Dividend Crisis

seekingalpha04-22

Petrobras investors faced significant uncertainty over the extraordinary dividend payouts.However, recent reports suggest the board has endorsed a 50% payout, potentially calming investor fears.PBR ...

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Don't be unduly concerned.   FabioIm Petróleo Brasileiro S.A. (NYSE:PBR) investors endured a torrid two months as they dealt with the uncertainties emanating from Petrobras's extraordinary dividend payout. As a reminder, the government seems displeased with paying these dividends to shareholders. Still, the irony is that the Brazilian government also needs the payout to support its fiscal budget. Moreover, the government is limited in its capacity to convert the extraordinary dividends into reinvestment in energy projects to bolster the economy. Brazil Finance Minister Fernando Haddad reminded stakeholders that \"extraordinary dividends, as per Petrobras bylaws, cannot be reinvested and should be paid out.\" As a result, PBR suffered significant downside volatility since topping out in February 2024, falling more than 20% through its mid-March 2024 lows before leveling off. However, dip-buyers likely assessed appeal in PBR's highly attractive valuation (assigned an \"A-\" valuation grade), notwithstanding the dividend payout uncertainties. Consequently, PBR has recovered more than 16% through last week's highs, as the market correctly anticipated that a steep pullback in PBR afforded investors solid buying opportunities. Accordingly, reports surfaced in early April indicating that the Brazil \"government might propose distributing 50% of extraordinary dividends.\" That seems to have received confirmation over the weekend, as Bloomberg reported that \"Petrobras' board has reached a consensus to distribute 50% of its potential extraordinary dividends from 2023.\" Petrobras is set to pay out about R$22B. We will likely get the confirmation needed in a shareholder meeting on April 25, with CEO Jean Paul Prates underscoring \"near-unanimous support for the 50% dividend payout within the board.\" As a result, the fallout between the Petrobras board seems to have received a timely near-term respite, potentially helping to stem further downside volatility in PBR. Notwithstanding the much-improved clarity for Petrobras's investors, as we head into the pivotal meeting, the recent fracas marked another unwelcome dispute between the Lula administration and investors with differing goals. As a reminder, Brazilian President Luiz Inácio Lula da Silva highlighted his displeasure with the market's selfish priorities, comparing the market to a \"dinosaur\" and a \"voracious rhinoceros.\" Therefore, I assessed that the potential threat of government intervention would continue to affect PBR's buying sentiments, dampening a more sustained valuation re-rating. Despite that, Petrobras management assured investors that Petrobras' capital allocation priorities have not materially changed, notwithstanding the decision to hold back the extraordinary dividend payout. The company still intends to pay out 45% of its free cash flow as dividends. However, it's increasingly clear that Petrobras investors must temper their expectations of massive dividend payouts in the future under the current administration. Despite that, Petrobras' highly profitable pre-salt assets continue to underpin the company's production growth story. Accordingly, pre-salt production reached 21.7M boe per day, contributing 78% of its total production. Moreover, the resurgence in Brent crude (CO1:COM) should lift Petrobras's ability to deliver higher realized prices, lifting its adjusted EBITDA margin accretion. In addition, Petrobras is expected to maintain robust growth in total average production growth through 2025, up 8.1% over 2024's estimates. As a result, the recent upcycle in the underlying energy market should lift near-term buying sentiments as PBR buyers reattempt another re-test on its recent 2024 highs.   PBR Quant Grades (Seeking Alpha) As seen above, PBR's buying momentum has remained relatively solid (\"B-\" momentum grade). Therefore, investors likely used the recent plunge to accumulate, corroborated by PBR's price action. Consequently, the interplay between PBR's attractive valuation and medium-term production opportunities seems constructive. While the threat of government intervention isn't welcome, the market appears to have reflected it. Moreover, with the headwinds of the extraordinary dividends expected to be resolved, I believe it has justified the optimism of PBR's recent dip-buying, as high-conviction investors ignored its momentary weakness.   PBR price chart (weekly, medium-term, adjusted for dividends) (TradingView) There's little doubt that PBR's medium-term uptrend bias remains intact, notwithstanding the selloff in February and March 2024. It was the steepest selloff since the volatility in late 2022. However, buying momentum in PBR has recovered remarkably, continuing a solid run since mid-March 2024. With increased clarity over the resolution of its extraordinary dividends payout, I believe PBR seems to be on its way to re-test its 2024 highs in due course. Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified. I Want To Hear From You  Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429928746"}