Equity Research

Latin America
Oil, Gas & Petrochemicals
Company Note
19 January 2015

Petrobras
When no news is good news

Rating

Brazil announces fuel tax hikes. Petrobras holds the line. Pump prices to rise.

12m Price Target

Brazil Finance Minister announced last night fuel tax increases of about 15% of

Price

Petrobras gasoline realization price, and 9% for diesel, to be implemented on Feb.

RIC: PBRa.N, BBG: PBR/A US

Neutral
US$11.00
US$7.19 (ADR)

st

1 . Petrobras followed with a press release stating that it would keep its net of tax
prices unchanged indicating that prices at the pump will rise, in spite of the 60%+

Trading Data and Return Forecasts

inflationary pain even when there could have been an argument to cut prices.

52-wk range
Market cap.
Shares o/s (m)
ADR ratio
Free float
Avg. daily volume('000 Shares)
Avg. daily value (US$ m)
Forecast price appreciation
Forecast dividend yield
Forecast stock return

Well remove our price cut assumption, but still a Neutral.

Stock Performance (US$)

premium that Petrobras now charging over Gulf of Mexico prices.

No change for Petrobras cash flow. But a strong signal for us.
Petrobras decision not to change its prices could be seen as no news for some. For
us it is a material change in the governments approach to the company and an
interesting signal that Petrobras might be able to enjoy well above normal returns in
its refining business for a while. Brazils government appears to be willing to take

In our last forecast review for Petrobras we had penciled in a 5% fuel price cut in the

50.0

first quarter that now seems much less likely. Well adjust our forecast for that. But we

40.0

are maintaining our Neutral rating unchanged. We dont see Petrobras balance sheet

30.0

improving even with flat prices, and 2008-11 has effectively taught us that high fuel

20.0

prices may come at a cost in the future.

10.0

US$21.86-7.19
US$46,895m
6,522.3
1 ADR: 2 LOCAL
52%
13,294
121.8
+53.0%
11.3%
+64.3%

120

90

60

30

Price Target (US$)

Stock Price (US$)

Rel. Ibovespa (US$)

A capital increase value of $8/ADR to which we ascribe an 80% possibility and a

balance sheet turn around scenario that puts value at $21/ADR.

Valuation
RoIC (EBIT) %
EV/EBITDA
P/E
Net dividend yield %

12/2012
6.7
7.3
11.6
3.6

12/2013
5.5
7.1
8.8
4.5

12/2014E
6.5
6.1
7.2
5.9

12/2015E
7.5
5.1
4.0
9.1

12/2016E
8.3
4.9
3.4
9.9

Financials (US$mn)
Revenues
EBITDA
Net Income
EPS (US$)
Net DPS (US$)
Net (debt) / cash

12/2012
143,976
27,200
10,838
1.66
0.98
(72,116)

12/2013
141,620
26,717
10,948
1.68
0.90
(94,573)

12/2014E
146,506
30,205
9,260
1.42
0.86
(117,323)

12/2015E
143,426
35,960
11,768
1.80
0.82
(136,236)

12/2016E
151,448
40,593
13,776
2.11
0.84
(151,778)

Gustavo Gattass
Brazil Banco BTG Pactual S.A.
gustavo.gattass@btgpactual.com
+55 21 3262 9299
Andres Cardona
Colombia - BTG Pactual
andres.cardona@btgpactual.com
+574 356 7421

Source: Company reports, Bovespa, BTG Pactual S.A. estimates. / Valuations: based on the last share price
of the year; (E) based on a share price of US$7.19, on 19 January 2015.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 5

Banco BTG Pactual S.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

19-Jan-15

19-Jul-14

19-Oct-14

19-Apr-14

19-Jan-14

19-Jul-13

19-Oct-13

19-Apr-13

19-Jan-13

19-Jul-12

19-Oct-12

19-Apr-12

Our target represents the weighted average of two alternate valuations for Petrobras.

19-Jan-12

0.0

Valuation: $11/ADR

Petrobras
19 January 2015

Is no action enough?
Paradigm shift?
A little while back, we wrote that we saw Petrobras capital increase as more likely
than the market because we saw it as the path of least resistance for Brazils
government to address Petrobras tenuous balance sheet position.
We believed then that Brazils government would chose to enact a debt for equity
capital increase with little or no impact on its budget, but a potentially devastating
impact on minority shareholders, because the other options were politically worse.
We saw it as a way out that showed sovereign support for bond holders and brought
no impact on inflation (vs. fuel price increases), GDP (vs. relevant Capex cuts) or
election potential (vs. core asset sales), which we saw as relevant government fears.
Yesterdays action, though, rocks our beliefs somewhat. Instead of pushing Petrobras
to offset an inflationary driver, as it did for many of the last years, and with more
rationality behind it now, Brazil seems to have accepted more inflation.
Not just a bit of inflation either... By our math, the tax hike with no offset from
Petrobras could hit Brazils inflation for about 30bp, making inflation somewhat high
even before the expected utility tariff hikes kick in.
Which, in turn, begs three questions...

Can this move by the government be a signal that Petrobras will be treated
differently in the future, and that it might potentially take precedence over Brazils
macroeconomic sacred cows?

Would the flat domestic fuel prices in the face of weaker oil prices and much
lower international reference prices for diesel and gasoline be enough to bring
Petrobras balance back in shape?

Is no action now enough of evidence that Petrobras will hold its prices while the
spell of low oil prices remains, or is the inflationary tax hike any indication that
Petrobras will up its prices if oil rallies?

The fair answer to the first question is that we do not know. There is definitely a
change in Brazils approach to the company here. But we do not know if this will
extend to a necessary Capex cut, or simply be an excuse not to do it.
Regardless, we can argue that we do not see this lack of action on fuel prices as
enough to address Petrobras balance sheet troubles. Assuming flat oil prices and
currency, wed see net debt to EBITDA of 4.0x by end 2015, rising to 4.5x in 2016.
And we also do not see the move as enough evidence of an easier time in the future
for Petrobras fuel pricing policy. Oddly, wed prefer to have clear and disclosed rules
rather than flat prices now.
Our Neutral remains unchanged, although we should update our forecasts soon.

page 2

Petrobras
19 January 2015

In summary...
Brazils government announced last night fuel tax hikes of some R$0.22/l ($13.3/b)
for gasoline and R$0.15/liter ($9.1/b) for diesel that represented, as of yesterdays
close, roughly 15% of Petrobras realization price on gasoline and 9% of its
st

realization price on diesel. The tax hikes will be implemented on February 1 and
should lead Brazilian consumers to have to pay some $6.7bn more for fuel.
At his press conference, Brazils Finance Minister was asked if Petrobras would offset
part of this tax hike, to which he answered that he did not know as that decision lay
with Petrobras itself. The question could be seen as fair in light of Petrobras recent
history of government support or for the sheer magnitude of the price premium that it
is now capturing relative to international parity, of some $32-26/b.
Petrobras itself issued a press release some hours after the Ministers press
conference stating that it would not change its net of tax prices and that as a result
fuel prices for Brazils distributors, and thus for end consumers, would be rising as a
result of the tax hike. We estimate that gasoline prices at the pump will rise by some
7.5%, with diesel prices rising by some 6.5%.
For us, the announcements of the government and of Petrobras itself represent a
very relevant shift in behavior for Brazils government. Not only does it signal a much
lower level of concern with Brazils inflation (which had been so detrimental to
Petrobras in the past), but it also seems to want to convey a message that Petrobras
will really behave and be treated as more of an independent company.
The move does not, however, make us significantly less concerned about Petrobras
risk of dilution through a capital increase over the course of the next twelve to
eighteen months. While it is a positive move, we dont believe that keeping prices flat
and delivering a lot of production growth is enough to lower the companys balance
sheet back in shape. And we continue to believe that is important.
If we were to assume that oil prices remained flat at around $48.8/b and that Brazils
currency remained flat at R$2.65/$, wed see Petrobras delivering some $33.6bn in
EBITDA, which would represent 3.2x net debt to EBITDA on its June 2014 debt
figures and as much as 4.0x on our forecast leverage for 2015, and rising to 4.5x by
the end of 2016, due to Petrobras strong Capex plans.
Ultimately, addressing Petrobras balance sheet requires more. We continue to
believe that asset sales would be an appealing approach, but by far, we believe that
Petrobras needs to be allowed to cut down on its capital spending significantly before
one can truly dismiss a capital increase risk for good. We are not there yet, and if
anything we fear that history offers a lesson here too.
Back in 2008-09, Petrobras was allowed to keep its fuel prices well above parity.
Financial performance was good enough that the company was able to issue more
than $70bn in equity. After the capital increase, though, Petrobras shifted to below
parity prices and continued to have to incur in massive Capex spend, driving its
balance sheet to where it is now. Wed rather have a clear and visible formula.

page 3

Petrobras
19 January 2015

Petrobras

page 4

Petrobras

Income Statement (US$mn)

Revenue
Operating expenses (ex depn)
EBITDA (BTG Pactual)
Depreciation
Operating income (EBIT, BTG Pactual)
Other income & associates
Net Interest
Abnormal items (pre-tax)
Profit before tax
Tax
Profit after tax
Abnormal items (post-tax)
Minorities / pref dividends
Net Income (local GAAP)
Adjusted Net Income
Tax rate (%)
Per Share
EPS (local GAAP)
EPS (BTG Pactual)
Net DPS
BVPS
Cash Flow (US$mn)
Net Income
Depreciation
Net change in working capital
Other (operating)
Net cash from operations
Cash from investing activities
Cash from financing activities
Bal sheet chge in cash & equivalents
Balance Sheet (US$mn)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Equity & minority interests
Total liabilities & equities

Company Profile:
Petrobras is a mixed-capital corporation that began operations
in Brazil in 1954, and it is linked to Brazil's Ministry of Mines and
Energy. Petrobras is the largest publicly traded oil company in
Latin America. It operates in the exploration, development,
production, refining, processing, trading, and transportation of
crude oil, oil products, natural gas, and other fluid
hydrocarbons.

12/2009
91,400
(61,685)
29,715
(7,387)
22,328
(1,462)
0
0
20,866
(4,991)
15,875
0
(1,377)
14,498
14,498
24
12/2009
3.30
3.30
0.95
20.77
12/2009
14,498
7,387
0
0
21,885
0
0
9,665
12/2009
16,455
42,433
58,888
131,561
0
7,041
197,490
39,422
0
39,422
56,909
9,117
105,447
92,043
197,490

12/2010
121,089
(86,923)
34,166
(8,409)
25,757
476
1,097
0
27,330
(6,947)
20,383
0
(404)
19,979
19,979
25
12/2010
3.06
3.06
1.02
28.31
12/2010
19,979
8,409
(5,883)
0
22,506
(43,383)
29,479
12,232
12/2010
28,687
58,688
87,374
170,251
0
55,364
312,990
45,519
0
45,519
70,754
9,981
126,254
186,736
312,990

Financial ratios
EBITDA margin
Operating margin
Net margin
RoE
RoIC
EBITDA / net interest
Net debt / EBITDA
Total debt / EBITDA
Net debt / (net debt + equity)

12/2011
145,781
(109,015)
36,766
(10,591)
26,176
230
73
0
26,479
(6,711)
19,768
0
121
19,889
19,889
25
12/2011
3.05
3.05
1.10
26.96
12/2011
19,889
10,591
323
0
30,803
(43,312)
(7,686)
(669)
12/2011
28,017
58,533
86,550
182,465
0
50,396
319,410
49,735
0
49,735
82,927
9,639
142,300
177,111
319,410

12/2012
143,976
(116,776)
27,200
(11,137)
16,063
1,377
(3,239)
0
14,201
(3,476)
10,724
0
114
10,838
10,838
24
12/2012
1.66
1.66
0.98
25.74
12/2012
10,838
11,137
310
0
22,286
(40,557)
(7,189)
(4,066)
12/2012
23,951
56,947
80,898
204,901
0
45,845
331,645
56,475
0
56,475
96,068
10,063
162,605
169,040
331,645

12/2013
141,620
(114,903)
26,717
(13,223)
13,494
8,223
(8,640)
0
13,077
(2,391)
10,687
0
262
10,948
10,948
18
12/2013
1.68
1.68
0.90
22.77
12/2013
10,948
13,223
(191)
0
23,980
(45,538)
(3,816)
(4,198)
12/2013
19,753
51,685
71,438
227,901
0
22,085
321,424
47,253
0
47,253
114,326
10,722
172,301
149,122
321,424

12/2014E
146,506
(116,302)
30,205
(13,500)
16,705
(4,680)
(197)
0
11,829
(2,376)
9,453
0
(193)
9,260
9,260
20
12/2014E
1.42
1.42
0.86
21.69
12/2014E
9,260
13,500
(3,457)
0
19,303
(43,974)
(17,798)
(12,210)
12/2014E
7,543
51,780
59,323
243,974
0
20,950
324,247
45,208
0
45,208
124,866
12,159
182,232
142,015
324,247

12/2015E
143,426
(107,466)
35,960
(15,227)
20,734
(80)
(4,478)
0
16,176
(4,276)
11,900
0
(132)
11,768
11,768
26
12/2015E
1.80
1.80
0.82
21.99
12/2015E
11,768
15,227
(1,406)
0
25,589
(45,328)
(2,774)
4,018
12/2015E
11,561
52,672
64,232
264,601
0
20,363
349,197
45,466
0
45,466
147,797
11,818
205,081
144,116
349,197

12/2016E
151,448
(110,855)
40,593
(16,193)
24,400
(78)
(5,191)
0
19,130
(5,314)
13,816
0
(40)
13,776
13,776
28
12/2016E
2.11
2.11
0.84
22.53
12/2016E
13,776
16,193
(1,143)
0
28,827
(44,664)
(8,209)
(511)
12/2016E
11,049
53,225
64,274
283,475
0
19,793
367,543
45,604
0
45,604
162,827
11,487
219,918
147,624
367,543

12/2012
18.9%
11.2%
7.5%
6.3%
6.7%
8.4x
2.7x
3.5x
29.9%

12/2013
18.9%
9.5%
7.7%
6.9%
5.5%
3.1x
3.5x
4.3x
38.8%

12/2014E
20.6%
11.4%
6.3%
6.4%
6.5%
153.4x
3.9x
4.1x
45.2%

12/2015E
25.1%
14.5%
8.2%
8.3%
7.5%
8.0x
3.8x
4.1x
48.6%

12/2016E
26.8%
16.1%
9.1%
9.5%
8.3%
7.8x
3.7x
4.0x
50.7%

Source: Company reports and BTG Pactual estimates. Valuations: based on the last share price of that year(E)
based on share price as of 19 January 2015

Petrobras
19 January 2015

page 5

Required Disclosures
This report has been prepared by Banco BTG Pactual S.A.
The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual
Rating
Buy
Neutral
Sell

Definition

Coverage *1

IB Services *2

Expected total return 10% above the companys sector

average.
Expected total return between +10% and -10% the
companys sector average.
Expected total return 10% below the companys sector
average.

46%

42%

48%

47%

6%

15%

1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
Absolute return requirements
Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy

Analyst Certification
Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:
(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco
BTG Pactual S.A. and/or its affiliates, as the case may be;
(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities
discussed herein.
Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the
restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.
Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual
S.A. and/or its affiliates.
Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the
signature list.

Statement of Risk
Petrobras is exposed to a number of risks in its activities that include: (i) exploration risk in its oil exploration portfolio; (ii) execution risk on new production and downstream assets; (iii) commodity
price risks on its day to day marketing and trading businesses; and (iv) administrative risks due to the potential change in management that the company faces every four years, in line with Brazil's
presidential elections. The most relevant risks to our forecasts focus on Petrobras' ability to increase its oil and gas production, its ability to keep domestic fuel prices high enough to maintain
profitability of its refining assets and the Brazilian exchange rate.

Valuation Methodology
N.A.

Company Disclosures
Company Name
Petrobras 1, 2, 4, 6, 18, 20

Reuters
PBRa.N

12-mo rating
Neutral

Price
US$7.19

Price date
19-1-2015

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.
2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment
services from this company/entity within the next three months.
4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.
6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which
represents the same interest of this company/entity.
18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class
of common equity securities
20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.

Petrobras
19 January 2015

Petrobras
Stock Price (US$)

Price Target (US$)

50.0
40.0
30.0
20.0
10.0

Buy
Neutral
Sell
No Rating

Source: BTG Pactual and Economatica. Prices as of 19 January 2015

19-Jan-15

19-Oct-14

19-Jul-14

19-Apr-14

19-Jan-14

19-Oct-13

19-Jul-13

19-Apr-13

19-Jan-13

19-Oct-12

19-Jul-12

19-Apr-12

19-Jan-12

0.0

page 6

Petrobras
19 January 2015

page 7

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