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Investing.com — Analysts at Bank of America (BofA) have downgraded Petroleo Brasileiro (BVMF:PETR3) shares to “Neutral” from “Buy,” reducing their price target. In a note released to clients last Friday, the firm said the new target price for preferred shares has been lowered from R$42 to R$34, while for ADRs traded on Wall Street, it was reduced from US$15.50 to US$12.50.
The changes in recommendation and target price “reflect a more challenging macro outlook and rising regulatory risks.” In BofA’s view, this scenario implies an increase in the WACC (Weighted Average Cost of Capital), from 14.8% to 15.4%.
Petrobras preferred shares opened down 1.75% at R$29.11 at 10:24 a.m. on Monday, while ADRs were trading down 2.30% at US$11.06.
Challenging macro
BofA analysts cited OPEC+’s new guidance to increase oil production to regain market share. This policy is taking place even in an environment where international oil prices are at low levels.
Another point mentioned is the import tariffs adopted by US President Donald Trump, which are expected to weigh on expectations for global economic growth. These uncertainties, together with the new OPEC+ guidance, are likely to exert downward pressure on the price of oil.
Increase in regulatory risk
The government’s difficulty in meeting fiscal targets could target the oil and gas sector. There is speculation about the adoption of an “oil package” to offset the previously announced increase in the Financial Transactions Tax (IOF).
In other words, the federal government could increase revenues by increasing royalties, special participation taxes, changing the reference price of oil, auctions and unitizing of Jubarte. In the case of unitization, the American bank estimates an impact of R$2 billion, equivalent to 0.5% of Petrobras’ capitalization.
BofA analysts estimate that the “oil package” could negatively impact Petrobras’ free cash flow. In addition, they raised the state-owned company’s risk premium from 7% to 7.5%.
As a result, BofA’s equity cost for Petrobras shares rose from 18% to 18.8%. The possibility of an upward adjustment in leasing payments in the commission for new platforms was also considered.
Dividends at risk?
BofA projects that Petrobras’ dividends should remain in double digits in 2025 and 2026, but without a broad competitive advantage in relation to other oil companies. The American bank’s calculations point to a dividend yield of 12.2% this year and 12.3% next year, under the assumptions of a barrel of oil price of US$ 67.00 (2025) and US$ 63 (2026), with free cash flow generation of 9.8% (2025) and 11.1% (2026).
The dividend yield should remain around 2 percentage points above that of its international competitors, but is far from the peak of the differential between 35% and 45% recorded in 2022.
BofA analysts also warn that the dividend yield could exceed cash flow generation under Petrobras’ current dividend policy. This scenario could materialize if oil prices remain low for a prolonged period, with no prospect of recovery, which could lead to a review of the dividend policy by Petrobras’ board of directors to prevent a deterioration in the company’s leverage.
Will Petrobras benefit from the “Trade Election”?
BofA analysts believe that the likelihood of a more market-friendly candidate winning the election is still premature, although they point out that it should gain traction later in the year. This narrative should strengthen as the market monitors President Luiz Inácio Lula da Silva’s increasingly negative rating in public opinion polls.
Petrobras shares may benefit from the “Trade Election,” but with limited gains. “We believe that stocks linked to the domestic economy should offer better returns,” say analysts at the American bank, citing macro and regulatory risks for Petrobras.