Petrobras (PBR) To Report Q4 Earnings: What's In Store?

Petróleo Brasileiro S.A. or Petrobras (NYSE:PBR) is set to release fourth-quarter 2017 results after the closing bell on Mar 20.

In the preceding three-month period, the Rio de Janeiro-headquartered integrated player reported a negative earnings surprise of 80.00%. Judicial contingency provisions, payments on account of a tax agreement with Brazil’s government, weak domestic demand and lower margin at its downstream unit affected the Brazilian state-run energy giant last quarter.

Petrobras has a mixed earnings surprise history. It has topped estimates in two of the last four quarters. However, the company posted an average positive earnings surprise of 23.16% in the aforesaid period.

Which Way are Estimates Treading?

Let’s look at the estimate revisions in order to get a clear picture of what analysts are thinking about the company before earnings release.

The Zacks Consensus Estimate for earnings for the to-be-reported quarter has been revised downward by 13 cents over the last 30 days. It reflects a decline of almost 14.3% from the year-ago quarter.

However, analysts polled by Zacks expect revenues of $26,321 million for the quarter, up 23% from the prior-year quarter.

Factors at Play

Prices of oil at the end of the fourth quarter were $60.46 per barrel, up about 12.5% and 19.6% year over year and sequentially, respectively. Improving energy landscape is attributed to tightening supplies, brighter demand outlook and OPEC-deal extension talks. The upstream segment of the company is poised to benefit from recovering commodity prices.

Petrobras is likely to witness output gains on the back of its encouraging portfolio of investments, particularly in Brazil’s pre-salt reservoirs. In fact, Petrobras released an output update in January 2018, wherein it announced the production of 2.15 million barrels per day (bpd) of oil in 2017, higher than 2016’s volumes. Notably, in the pre-salt layer, its average annual production witnessed a 26% year-over-year increase, driven by Santos Basin’s Lapa and Lula fields. Further, its strategic partnership with foreign oil giants including TOTAL S.A. (NYSE:TOT) , Royal Dutch Shell (LON:RDSa) plc RDS.A and Statoil (OL:STL) ASA (NYSE:STO) is expected to drive its exploration momentum.

The company’s cost-cut initiatives and aggressive divestment of non-core holdings, in order to revive its financial health, also bode well.

However, while the company has been making serious efforts to trim its leverage metrics, one can’t deny the fact that its involvement in the Operation Carwash scandal has been a major overhang for the company, which scarred its credit metrics and turned it into the world's most-indebted oil company. Though the company’s rating is gradually improving, it is still two levels away from the investment-grade ratings.

Notably, in January 2018, Petrobras agreed to pay $2.95 billion to settle class-action lawsuits filed by investors and put to rest one of the Brazil’s most notorious cases of fraud. The settlement will be reflected in the company’s fourth-quarter 2017 results, putting a dent in the earnings.

As such, though we believe that the company will benefit from pricing and production gains, the huge payout relating to corruption charges, along with its massive debt are likely to play a spoilsport.

Earnings Whispers

Our proven model too 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 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 -43.40%. This is because the Most Accurate estimate is pegged at 10 cents while the Zacks Consensus Estimate stands at 18 cents.

Zacks Rank: Petrobras carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here. Though a Zacks Rank #3 increases the predictive power of ESP, the negative ESP makes a surprise prediction difficult.

Conversely, 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.

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