Petrobras - Management Reshuffle Brings A Lot Of Questions

Wagner Meier

Overview

Since Lula de Silva has been elected arsenic caller Brazilian president, Petrobras’ (NYSE:PBR) banal is connected a downward trajectory. Petrobras banal mislaid implicit 35% from its peak, reached successful mid-November 2022, and it is wide underperformer among its peers. Petrobras trades lone for 3.3x FY2023 expected net and looks highly inexpensive connected cardinal basis. Nevertheless, banal seems to beryllium inexpensive for close reasons and successful the adjacent aboriginal determination aren’t galore catalysts which would beryllium otherwise.

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Management reshuffle

Previous week, Petrobras informed that, astatine the time, existent CEO, Mr. Caio Mario Paes de Andrade, agreed to aboriginal termination from his position. New relation arsenic a CEO volition undertake, Jean Paul Prates, initially a legislator for Lula’s Workers’ Party. Mr. Prates volition beryllium the 11th CEO of Petrobras since the Lula’s archetypal government. Even though, Mr. Prates is considered to beryllium an expert successful the vigor sector, helium has been known arsenic a critic of existent management. Mr. Prates confirmed that signifier of changing home substance prices successful enactment with planetary markets should alteration and caller terms guidelines volition beryllium created. Petrobras has been often criticized by politicians from Workers’ Party for its inability to modulation into renewable sources of energy. It is expected that Mr. Prates volition enactment connected this transition. This people brings a batch of unknowns successful the eyes of the concern public, particularly successful presumption of aboriginal investments and profits.

Change successful concern strategy

In caller years Petrobras has been lasting betwixt stone and the hard place. It has been hailed by investors for delivering precocious dividends and criticized by the authorities for not doing capable successful fixing precocious lipid prices and focusing connected renewable projects. Its strategy was focusing connected the astir profitable lipid projects connected 1 manus and selling of little profitability assets connected the other. This strategy has led to expanding dividends and slashing its debt. Investors cheered this improvement and banal terms roseate accordingly. Since the predetermination of caller Brazilian president, determination was a large U-turn successful its business strategy and successful a mode however Petrobras should look similar successful adjacent 5 to 10 years. New Brazilian vigor curate stated that Petrobras should absorption connected expanding country’s refining sector. Problem with gathering caller refineries is that they instrumentality years to build. In the meantime, respective factors tin alteration successful presumption of request – proviso dynamics, not to notation accomplishment of caller authorities with antithetic priorities.

Additionally, successful caller weeks respective authorities representatives stated that Petrobras should travel different planetary lipid majors successful investments successful renewables. This thought is not new, but was abandoned by erstwhile absorption arsenic it would distract their attraction from higher profitable projects successful pre-salt lipid fields.

At the moment, determination is not a wide thought however last concern strategy volition look like, nevertheless from what is publically known, it volition beryllium overmuch antithetic than what investors were utilized to successful past 2 years. In words of Peter Lynch, Petrobras is undertaking each steps successful diworsification of its business. It wants to beryllium contiguous successful businesses with constricted operational ratio and alternatively it mightiness suffer its borderline successful the concern wherever it has competitory advantage.

Portfolio positioning

How should investors respond to existent developments? Should they buy, hold, oregon sell? Clearly, Petrobras trades with a discount to its peers (3.3x FY2023 PE vs. 5.3x PE for adjacent group). The Brazilian Bovespa trades implicit 7 times guardant earnings. However, Petrobras’ discount is based connected statement numbers, and they tin beryllium precise volatile and unstable. If idiosyncratic was buying Petrobras connected the communicative of profit-oriented management, expanding dividends, and lowering debt, past this communicative is not valid anymore. Petrobras tin yet crook into valuation play. If investors spot that caller concern strategy is not truthful destructive arsenic it seems, past immoderate much tenable valuation multiples tin beryllium applied. I would expect that immoderate insignificant repricing is possible, but I wouldn’t expect the repetition of past 2 years successful presumption of terms appreciation. For me, Petrobras belongs into class “wait and see”, but unluckily it is nary much successful the class “buy and ne'er sell”.

I americium a portfolio manager astatine IAD Investments, an plus absorption institution based successful Slovakia. My concern beingness are Emerging Markets with the main absorption connected companies located successful Central and Eastern Europe. My extremity arsenic a manager is to hunt for undervalued companies and mistakes successful the markets and incorporated these views successful the concern portfolio.