Petrobras Share Drop May Be Short-Lived

(Bloomberg) -- The decline in Petroleo Brasileiro SA shares after Tuesday’s lackluster earnings report may have created a good entry point, analysts said.

Overall, Brazil’s state-controlled oil giant reported earnings that were in line or slightly below market expectations on Tuesday, with stronger oil prices and a weaker currency countering the company’s lower-than-expected production and a deterioration in cash flow.

Shares fell as much as 4.15 percent to 26.99 reais in Sao Paulo after the firm said production declined 5.5 percent on quarter. The output decline was driven mainly by outages due to the completion of platform upgrades, as well as the sale of stakes in the Lapa and Roncador offshore projects, said Solange Guedes, the head of exploration and production.

Petrobras’s "true potential" wasn’t on display in the third-quarter results, said XP Investimentos. "The current trend of lower production should reverse” when new units are connected in the deep-water Santos Basin, analyst Gabriel Francisco wrote in a report, reiterating its buy rating for the stock.

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Bradesco BBI analysts Vicente Falanga and Osmar Camilo also reaffirmed their outperform recommendation, expecting 2019 to be a ‘fundamentally very solid year for Petrobras,’ with production growing around 10 percent.

A continued decline in leverage amid solid results and the resumption of Petrobras’ divestment program should support the stock’s performance, according to Banco Santander SA. The company should end 2018 with net-debt-to-earnings near 2.2, below its internal target of 2.5, which reflects “sound quarterly results that we expect” in the fourth quarter, analysts Christian Audi, Gustavo Allevato, Rodrigo Almeida said in a note.

Petrobras is expected to make more announcements about asset sales before the end of the year, Chief Financial Officer Rafael Grisolia said on a call with analysts. The producer is waiting on an offer for chemicals producer Braskem SA before deciding if it will keep or sell its stake, he said.

Itau BBA analysts led by Andre Hachem highlighted that the three platforms that started operations during 2018 will help boost production in 2019. Currently, the stock has five buy recommendations, seven holds no sells, with an average price target of 28.55 reais, according to data compiled by Bloomberg. Shares were down 2.3 percent at 27.50 reais at 4:33 p.m. in Sao Paulo.

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