To The Moon

$Petroleo Brasileiro SA Petrobras(PBR)$

Is Petrobras a Great Dividend Investment with Its 21% Yield? Or Is It a Value Trap? Today, we’ll analyze Petrobras, the largest oil and gas company in Brazil, using our seven-step process to answer these questions. Let’s dive in.

Overview of Petrobras

Petrobras is primarily government-controlled, with the Brazilian government holding the majority of voting rights. This allows the government significant influence, including management and board decisions, which change almost entirely after every election. This raises potential concerns for shareholders, as government objectives may not align with investor interests.

Historical Performance

If you invested $1,000 in Petrobras 10 years ago, you’d now have 141 shares worth approximately $11,992. Additionally, the company has paid $1,680 in dividends over the decade. Combined, that’s a total value of $13,672—equivalent to a 267% gain in 10 years, which is impressive. However, the company’s ownership structure warrants closer examination.

Ownership Structure

Individual Insiders: Own 0% of the company, reflecting the short tenure of management (less than two years on average).

Government Stake: 29% ownership, with a “golden vote” granting control. This raises potential red flags.

Institutional Investors: 7.34% of total capital

Super Investors: Only one (Howard Marks) has invested in Petrobras, but he recently reduced his position by 9.7%, selling nearly 450,000 shares.

Earning Overview

Net Profit: R$32.6 billion (approximately $5.7 billion), marking a 22% increase compared to the same period in the previous year. Recurring EBITDA: $11.6 billion, indicating strong operational performance. Operating Cash Flow: $11.3 billion, a 24% increase from the previous quarter, underscoring effective cash generation.

Fundamental Analysis

Return on Invested Capital (ROIC): 2.4% (10-year median), far below the desired 10%. The Board approved the payment of R$17.12 billion in dividends, to be distributed in two installments, aligning with Petrobras' Shareholder Remuneration Policy.

Net Profit Margin: 18.6% (5-year average), well above the sector median of 11.4%.

Share Buybacks: 1.2% reduction over the past decade—modest but acceptable.

Debt: The company could pay off long-term debt in under a year using free cash flow.Reduced to $25.8 billion, the lowest level since 2008, reflecting prudent financial management.

Growth Indicators

Revenue Growth: -3.2% (10-year CAGR), reflecting the cyclical nature of the industry.

Free Cash Flow Growth: 0% over the past decade.

Earnings Per Share (EPS) Growth: -88.4% in 10 years, indicating significant volatility.

Free Cash Flow

Third Quarter 2024: Petrobras reported a free cash flow of approximately $6.86 billion for the quarter ending September 30, 2024. Ending September 2024: The company's free cash flow totaled around $27.64 billion, indicating consistent cash generation over the year.

In the first nine months of 2024, Petrobras made substantial investments totaling $10.9 billion, reflecting a 19.5% increase over the same period in 2023. These investments are primarily focused on large pre-salt projects, aiming to enhance future production capabilities.

Dividend Analysis

• Yield: 21%, with shareholders receiving $2.98 per share last year—a remarkable return.

• Payout Ratio: 42.9%, within the desired range (below 50%), suggesting sustainability.

• Dividend Growth: 536% over five years, though this is heavily influenced by cyclical factors and may not be reliable.

Society Support

Petrobras demonstrates a significant commitment to integrating its business goals with societal and environmental progress, though challenges such as political influences and environmental risks remain areas of focus for continuous improvement.

Education and Training: Petrobras Socioenvironmental Program: Supports educational initiatives focusing on environmental conservation and sustainable practices.Offers scholarships and professional training programs, particularly in engineering and technical fields, benefiting underserved communities.

Community Development:Implements projects to improve infrastructure, access to basic services, and quality of life in the regions where it operates.Promotes cultural initiatives to preserve Brazil’s heritage and support local artists.

Crisis Response and Support: Disaster Relief Provides financial and logistical support during natural disasters, such as floods and fires, in Brazil. COVID-19 Pandemic Response:Donated medical supplies, including ventilators and PPE, during the pandemic.Supported research and development of vaccines and treatments.

Valuation

Price-to-Earnings Ratio (P/E): 5.14, indicating a low price for current earnings compare to XOM PE 13.47.

Intrinsic Value (Discounted Cash Flow Analysis):Low Scenario: $27Medium Scenario: $39High Scenario: $48 Applying a 30% margin of safety, fair values are $19, $27, and $33, respectively. With a current price of ~$13, Petrobras appears undervalued.

Risks and Considerations

Petrobras’ low valuation and high dividend yield are appealing. However, risks include:

• Government influence and unpredictability.

• Cyclicality, which can lead to dramatic shifts in performance and dividend payouts.

• Limited insider ownership and low super-investor sentiment.

Final Thoughts

Petrobras offers an attractive valuation and dividend yield, but its cyclical nature and government control introduce significant risks. It ranks as one of the cheapest company in stock ranking, Investors should carefully consider whether such a volatile and politically influenced company aligns with their investment strategy. Always use this analysis as a starting point and conduct thorough due diligence.

Petrobras appears to be trading below various intrinsic value estimates, with favorable valuation metrics and positive analyst sentiment. However, potential investors should consider the associated risks, including political factors and market volatility, before making investment decisions.