Petrobras (PBR): What Will Q1 Earnings Release Unveil?

Brazilian state-run energy giant Petroleo Brasileiro S.A. or Petrobras (NYSE:PBR) is set to release its first-quarter 2017 results on May 11.

In the preceding three-month period, the Rio de Janeiro-headquartered integrated player delivered a positive earnings surprise of 5.00% on the back of higher production and cost cuts.

Coming to earnings surprise history, Petrobras has a good record: its beaten estimates in three of the last four quarters.

Let’s see how things are shaping up for this announcement.

Factors to Consider This Quarter

At the end of the first quarter, oil was trading at $50.60 per barrel, while natural gas hovered around the $3.20 per million British thermal units – both in a sweet spot compared to the corresponding period of 2016. While crude slumped to a 12-year low in the year-ago quarter, natural gas futures dropped to its worst level in almost 17 years.

All this bodes well for Petrobras and its upstream unit in particular. Improving commodity prices would also considerably augment the group's cash flows. Petrobras’ successful cost reduction initiatives and efficiency gains are expected to further cushion the results.

However, sometime back Petrobras cut prices for diesel by 2.7% and gasoline by 3.2% to protect market share and bring about greater transparency to lure buyers for its assets on the block. This may adversely impact Petrobras' near-term results.

The company, which is said to explore strategic partnership with world’s largest publicly listed energy producer ExxonMobil Corp. (NYSE:XOM) , had net debt of $96,381 million, with net debt-to-capitalization ratio approximately 55%. As such, leverage remains a key area of concern for the firm.

Earnings Whispers

Our proven model does not conclusively show that Petrobras will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -14.29%. This is because the Most Accurate estimate stands at 6 cents, while the Zacks Consensus Estimate is pegged higher, at 7 cents.

Zacks Rank: Petrobras has a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Petrobras, here are some energy firms you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Gulfmark Offshore Inc. (OTC:GLFM) has an Earnings ESP of +15.19% and a Zacks Rank #3. The partnership is expected to release earnings results on May 15. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Superior Drilling Products Inc. (NYSE:SDPI) has an Earnings ESP of +100.00% and a Zacks Rank #3. The company is anticipated to release earnings on May 12.

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