Petrobras

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A Brazilian state-controlled company, Petrobras is one of the largest producers of oil and gas, mainly engaged in exploration and production, refining, transportation, and marketing of petroleum and related products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Petrobras operates as a vertically integrated oil and gas company, with its business spanning from exploration and production to refining and distribution of products.

Exploration & Production (E&P): Petrobras’s core activity is the exploration, development and production of oil and gas reservoirs, particularly in Brazil. This segment includes deepwater and ultra-deepwater operations, which account for a significant share of the company’s total production. It also operates in other basins across South America, North America, and Africa. The majority of production is focused in Brazil, and they are focused on pre-salt and ultra deep water activities.
Refining, Transportation & Marketing (RTM): This segment is responsible for operating refineries, logistics, transport, acquisition and sales of oil, crude, and refined oil products. RTM includes trading of crude and oil products in international markets. Petrobras operates 12 refineries in Brazil and maintains a vast transportation network that moves their product to market.
Gas & Low Carbon Energies (G&LCE): This segment encompasses the activities of the logistic and trading of natural gas and electricity. This business includes thermal power generation by natural gas and diesel fuel, production and commercialization of gas, and investments in low carbon emissions. It also focuses on new businesses and technologies for the energy transition.

Industry Trends

Global Oil & Gas Market: The oil and gas market is characterized by a high degree of volatility, driven by geopolitical factors, supply and demand imbalances, and economic cycles. Demand for oil and gas products is influenced by economic growth, industrial activity, and consumer behavior. Oil prices, especially, fluctuate wildly.
Increasing Focus on Sustainability and the Energy Transition: There is a growing global demand for low-carbon energy solutions, as governments, companies, and consumers push to reduce carbon emissions. This is causing traditional oil and gas companies like Petrobras to diversify their portfolios with renewable energy. Petrobras has been pivoting towards the energy transition by focusing on natural gas as a transitional fuel and investing in renewable energy projects.
Emerging Markets: Emerging markets, like China, India, and Brazil, are expected to contribute a significant share of demand growth in the energy sector. While the Western world is increasingly focusing on alternative energy, Asia and South America are still expected to be major contributors to oil and gas demand.

Competitive Landscape

The global energy industry is highly competitive. Petrobras competes against major international oil and gas companies, national oil companies, and smaller independent producers.

International Majors: Companies like Exxon Mobil, Shell, TotalEnergies, Chevron, and BP have huge scale, vast experience, and large R&D investments and are formidable competitors to Petrobras in its global ambitions.
National Oil Companies (NOCs): Other NOCs from around the world like Aramco, ADNOC, and CNPC, which enjoy direct government backing and have great resources also compete directly or indirectly with Petrobras.
Smaller Independents: Smaller players also exist and tend to have more flexibility to react quickly to short term opportunities and also to enter niche and underserved markets.
Increasing Competition in Trading: With greater competition for distribution assets, and with the growth in digital platforms to trade assets, the business of selling oil is becoming more competitive.
Growing Focus on Low-Carbon Energy: With governments incentivizing green energy and the growth of public awareness for the environment, companies producing low-carbon energy such as solar, wind, hydrogen, biofuels, and other renewables are increasingly becoming a competitive threat.

What Makes Petrobras Different?

Deepwater and Pre-Salt Expertise: Petrobras has gained expertise in drilling in deepwater, and pre-salt fields. Brazil is home to many pre-salt oil deposits, and Petrobras is among the leaders in extracting it. This is a competitive advantage.
Strong Government Ties: The controlling shareholder of PBR is the Brazilian government, giving the company some unique advantages that are not always enjoyed by privately controlled companies. On the other hand, this also subjects the company to some risk of government-led decisions that are not purely financial.

Recent Concerns, Controversies, and Problems

Political Instability in Brazil: Brazil’s volatile political environment and the associated macroeconomic issues remain a major risk for the company. Any political or social instability could have a significant impact on the performance of PBR and its financials. Recent changes in government and government policies will need to be closely watched by investors.
Debt: The company still has sizable debt which may become an issue when energy markets are unfavorable.

Financial Performance

Revenues: PBR’s revenues are mainly derived from sales of oil, natural gas, and related products, with fluctuations driven by commodity prices, currency changes, and global events. The year-on-year fluctuations in revenue are very high.
Operating Margin: Operating margins depend on factors such as oil prices, refining capacity, production costs, and taxes. These numbers also vary a lot in line with global energy prices. Currently, the margins are relatively high due to the high price of crude.
Profitability: The net income for PBR is very volatile and depends significantly on the global energy markets. For example, in 2022 the net income was USD 20.95 billion but in 2020, the company lost a massive $1.15 billion.
Free Cash Flow: As a vertically integrated company, PBR has a very positive cashflow from operations, although, they have substantial capex requirements which brings down the free cashflow generation ability.
Balance Sheet: PBR has a rather large debt of 44.7 billion but has a decent cash position of 17.2 billion. The company also has large amounts of non-controlling interests to contend with.

Moat Rating: 2 / 5

Petrobras’ moat is limited by several factors. The company does have a few competitive advantages due to its location in Brazil and expertise in deep water oil exploration. However, the company faces competition from various international oil majors and the risk of having the Brazilian government as its controlling stakeholder. The company also has a high amount of debt and their revenues are very dependent on global crude oil prices. This makes the moat relatively narrow and not that deep.

Understandability: 4 / 5

While the oil and gas business is easy to conceptually understand, there are many moving parts in Petrobras that are hard to understand, such as its various divisions, relationships with the Brazilian government, international markets, etc. I would have liked to give a higher score, but the complexities make it challenging to understand each and every part of their business.

Balance Sheet Health: 3 / 5

The company currently has a lot of debt which is almost twice the value of cash the company has. Although the debt levels have come down significantly from 2021, these are still substantial. So, the balance sheet health could be a bit better. But it is not that bad either, the operating cashflows are healthy, which supports their long-term ability to pay off debt. However, any adverse change in the economic climate or a major drop in oil price could impact them significantly. I recommend a watch out for the debt as it is something that might hurt the company in the future if not monitored appropriately.