Oil prices have been on a tear since OPEC+ countries Russia and Saudi Arabia earlier this month extended voluntary supply cuts through the end of 2023 - several months longer than expected. Meanwhile, consumer inflation hit its highest point of the year in August, led by energy prices - and the Energy Information Administration (EIA) predicts that oil demand will continue to outpace supply going forward, which should support higher oil prices for the foreseeable future.
These factors are certainly being reflected in the crude futures market. In today's session, oil prices have once again hit a new year-to-date high, with the WTI crude futures contract for October delivery (CLV23) touching an intraday peak of $92.33, and the more active November contract (CLX23) climbing up to $91.36.
One way for investors to leverage rising oil prices is by picking up shares of energy stocks with strong fundamentals, solid operational strength and execution capabilities, healthy dividend yields, and significant cash reserves.
In this piece, I highlight one top petroleum company with operations worldwide that's a well-established outperformer.
About Petrobras
Founded in 1953, Brazil-based Petroleo Brasileiro S.A., better known as Petrobras (PBR), is a state-owned oil and gas company with operations in more than 20 countries. It is the largest oil and gas company in Brazil and Latin America, and is also the world's largest producer of offshore oil. The company currently commands a mammoth market cap of $99.13 billion.
Petrobras stock is up an impressive 64.2% on a YTD basis, comfortably outperforming a 7.6% gain in the Energy Select Sector SPDR Fund ETF (XLE) over the same period.
So, what makes Petrobras stock a buy right now? It's more than rising oil prices - let's get into it.
1. Favorable Earnings Comparisons & Pricing Power
In its latest quarterly results, Petrobras reported an increase in operated production levels across its key segments like exploration, refining and marketing, diesel, and gasoline, among others. Exploration and production reported production of 3,693 thousand barrels of oil equivalent per day (MBOE/D), up 4% from the prior year.
Similarly, production volumes also rose in refining (up 2.1% YoY), diesel (up 1.4% YoY), gasoline (up 4% YoY), fuel oil (up 12.7% YoY) and LPG (up 11.6% YoY).
However, like other energy companies, Petrobras reported a year-over-year decline in revenue and earnings due to lower global commodity prices during the first half of 2023. Revenues for the April-June period came in at about $23 billion, down 34% from the prior year. EPS was cut nearly in half from the previous year to $0.90, which fell short of the consensus estimate of $0.97. Previously, PBR's EPS had topped consensus estimates in each of the past four quarters - though, on the plus side, comparisons should be more favorable going forward.
Plus, Petrobras recently increased wholesale fuel prices in its home country of Brazil, reflecting its strong pricing power. Wholesale gas and diesel prices were hiked by 16% and 26%, respectively.
2. Healthy Dividend Yield & Reasonable Valuation
Petrobras recently confirmed that it would restrict dividend payments moving forward to 45% of its free cash flow, compared to 60% previously. That said, the company offers a solid 6.59% dividend yield to supplement its outsized share price returns.
Meanwhile, even after the stock's standout rally so far in 2023, Petrobras' valuation remains at attractive levels relative to its peers. PBR's forward price/earnings (P/E) ratio is at 4.37, which is lower than Exxon Mobil (XOM) at 13.27, Occidental Petroleum (OXY) at 17.73, BP (BP) at 7.22, and Chevron (CVX) at 12.64. Similarly, Petrobras has the lowest price/book (P/B) and price/cash flow (P/CF) ratios of the group, with its P/B at 1.30 and P/CF at 2.10.
3. Analysts Are Increasingly Bullish
Overall, analysts remain cautiously optimistic about Petrobras stock, with the consensus rating now at “Moderate Buy” - up from “Hold” a month ago. PBR now has 3 “Strong Buy” and 3 “Hold” ratings from analysts, compared to 1 “Strong Buy” and 5 “Holds" previously.
Notably, the mean target price of $15.47 is nearly flat with PBR's current price, but the Street-high target of $18.30 indicates upside potential of about 18% from current levels.
Final Takeaway
With oil futures still on the rise, picking up shares of an industry leader like PBR looks like a solid choice - especially if a recovery in demand from the key Chinese market provides another layer of support for energy prices.
Not only do PBR's generous dividend yield and reasonable valuations look attractive, but its dominant position in the global petroleum space, strong pricing power, and access to large reserves of oil leave the company well-positioned to benefit from the prevailing macroeconomic tailwinds.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
