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For Brazilian oil and natural gas giant Petrobras , Jefferies says to “let the assets do the talking.” The firm initiated coverage on Petrobras with a buy rating. It believes its pre-salt oil portfolio offshore Brazil gives it one of the strongest asset bases among global energy names — but shares are currently trading at a 30% discount to its peers. “Its new strategic/financial envelope has removed uncertainties, turning PBR into a … upstream volume growth story. The market underappreciates PBR’s high margin pre-salt assets & cash returns ability in an US$80/bbl oil world,” analyst Alejandro Anibal Demichelis wrote in a Thursday note. “Crucially, this growth comes from low cost pre-salt fields and some areas (eg, Buzios field) bring low cash taxes. Thus, the market looks to underestimate the boost to PBR’s CF that this increased output should bring,” he continued. Jefferies’ set a $21.20 price target on shares, which implies nearly 38% upside potential from Wednesday’s close. Shares ticked down 0.5% Thursday before the bell. The company’s updated financial framework includes dividend distributions of 45% of its free cash flow. This will likely put its 2024 dividend yield at 13%, with an extra 1% raise from its preferred share buy back. In comparison, other international oil companies have an average of 11% shareholder distribution yields and 5% dividend yields, according to Demichelis. To be sure, Petrobras was notably centered in Operation ” Lava Jato ,” or “Car Wash” in Brazil beginning in 2014. The company was found to have been in a multimillion dollar kickback scheme with prominent politicians and corporations in return for contracts with Petrobras. Despite these overhangs, Demichelis thinks Petrobras has “stronger governance than [the] market assumes.” “Governance is a top investor consideration around LatAm national oil players and more so when it comes to PBR, given its past issues (eg, ‘Car Wash’ case) and public pressures from Brazil’s new administration to shift the firm’s fuel price policy – albeit noise levels around PBR have recently come down,” Demichelis said. “We believe that the market underestimates PBR’s enhanced governance framework and the requirement for the government to compensate PBR in cases where it forces the firm to operate outside competitive practices.” Jefferies’ call comes as crude prices have been on a tear recently. This month, West Texas Intermediate futures are up more than 6%. —CNBC’s Michael Bloom contributed to this report.
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