Petrobras stock surprises higher with dividend (NYSE:PBR)
I don’t think Petrobras (PBR) (PBR.A) needs any introduction. As one of the largest oil producers in the world, it offers excellent exposure to rising oil prices despite the more difficult situation in domestic markets where politics plays a big role. The stock price has been held back due to political uncertainty as some presidential candidates seem to think Petrobras is making “too much” money, but I think incoming corporate taxes will alleviate those concerns. Just to put it into perspective, the more than $8 billion in corporate taxes owed on 2021 earnings is about 0.5% of Brazilian GDP. In the current oil context, the company is already a sort of golden goose for the government.
Fourth quarter results confirm that Petrobras is a cash monster
In the fourth quarter of 2021, Petrobras reported total revenue of just over $24 billion and gross profit of $10.6 billion. That’s a little lighter than Q3 2021, but luckily the company was able to cut some expenses elsewhere, resulting in underlying operating profit of $8.8 billion (excluding $272 million in impairment reversals and $1.2 billion of “other income” due to asset sales).
As you can see in the image above, the company’s interest expense decreases very quickly as gross debt and net debt decrease, making the company a better consideration for lenders. because the balance sheet risks have now evaporated. Net income was approximately $5.64 billion, which equates to approximately $0.86 per ADR (considering that an ADR consists of two shares and there are just over $13 billion in shares). shares and therefore 6.5 billion ADRs in circulation).
Looking at the cash flow statement, Petrobras reported total operating cash flow of $9.2 billion. We still have to take into account the changes in the working capital position (a contribution of $900 million) and we also have to deduct the $1.45 billion in lease payments as well as the $360 million in interests. And finally, the company only paid $1.2 billion in taxes, though about $2.27 billion was owed on fourth-quarter results. Thereafter, we must add the nearly $500 million in dividends received from the issuing companies.
This translates to adjusted cash flow from operations of $5.9 billion. Total capex was $1.7 billion, resulting in free cash flow of $4.2 billion. It’s about $0.64/share.
This may sound disappointing, but let’s not forget that the fourth quarter was an investment-intensive quarter: while Petrobras reported a depreciation charge of $2.91 billion, its total investments + payments rental amounted to more than $3.1 billion. In addition, the income statement was boosted by the reversal (non-cash) of prior impairment charges.
Dividend turns out to be above $1/ADR
While very high free cash flow in the current oil price environment is a given, most shareholders are eagerly awaiting dividend declarations. In December, Petrobras was already very generous with a higher-than-expected dividend, as it surprisingly increased the December payout after reporting stronger-than-expected third-quarter results, which made the announced payout quite low. And it looks like Petrobras will continue to be a generous dividend payer.
The company announced that it would pay a dividend of BRL 2.861 per share. Considering that each ADR consists of two underlying shares, the dividend per ADR will be 2*2.861 = BRL 5.722 per share. Using the current exchange rate of 5.15, this essentially means a payment of $1.11 per ADR. Not bad for a quarterly dividend.
ADRs will trade on an ex-dividend basis from April 14, but payment will not be made until May 23. It’s relatively late and I think we can expect another dividend announcement before this fourth quarter dividend is paid. Given that the stock will only trade ex-dividend in about six weeks, it might be worth picking up some falling stocks before the ADRs trade on an ex-dividend basis.
I usually don’t like to make bold statements, but in my article three weeks ago I was convinced that Petrobras was on track to pay out at least $10/ADR in dividends over the next five years, even if a lower oil price was used to calculate free cash flow and dividend paying capacity. With a first dividend of around $1.11 already below my belt, I remain very confident in my projections, even using a lower oil price.
You might worry about declaring a dividend of $1.11 when the fourth quarter free cash flow result was around $0.64/ADR. A few mitigating factors can explain this. First, the fourth quarter dividend payout also appears to be partly a “catch-up” payout based on full-year results: FY2021 free cash flow (on an adjusted basis) was greater than $17 billion or $2.65/share. . Second, Petrobras also recorded a profit and a net cash inflow from the sale of assets. I haven’t included them in my underlying free cash flow calculation because asset sales are a one-time item. During the fourth quarter of 2021, Petrobras recorded a cash inflow of approximately $0.30 per ADR from the sale of assets.
I would not count on future (quarterly) dividends to continue above $1/ADR but I remain very confident in the 2022-2026 plan. I have reduced my exposure to Petrobras as part of my portfolio management (avoiding too much overweight) but I plan to maintain a large position in Petrobras for the time being.
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