3R Petroleum (RRRP3) jumps on level change and expectation that stock will rise more than 100% in 2023

This Wednesday session (11th) is a high one for oil stocks, on a good day for Brent prices (up more than 1%), but also with news of companies moving assets.

The highlight is 3R Petroleum (RRRP3), with shares up more than 8% around 1pm (Brasilia time), trading above R$42.

Two pieces of news have revived the company’s assets: the start of coverage of the title with a positive view by JPMorgan (confirming the opinion of several analysts according to which the title could more than double in value) and the production data of December released the night before that indicate a “level change”.

JPMorgan analysts have begun covering 3R Petroleum (RRRP3) stock with a recommendation overweight (exposure above market average, equivalent to buying) and target price of 100 BRL for December 2023 (potential for 156% appreciation from the previous day’s close), according to a report sent to clients on Wednesday. The bank has also initiated hedging for PRIO shares (PRIO3) also with a recommendation overweight and target price of BRL 56 (55% upside). At the same time, PRIO3 shares increased by 4.39%, to R $ 37.80.

“We remain fundamentally optimistic about the medium-term outlook for crude oil and despite our economists’ view of modest growth in the global economy in 2023, the bank’s Commodities team still expects robust oil demand,” the analysts said.

In this context, Milene Clifford Carvalho and her team said they are constructive towards oil companies in Latin America, especially the private ones PRIO and 3R Petroleum. “We view ‘juniors’ as the best vehicles to benefit from Brazil’s oil supercycle.”

Citing proven operational experience and sound financial management, they assess that PRIO is well positioned and that its growth will benefit from the high oil backdrop, being strengthened by the implementation of the second phase of Frade revitalization, Wahoo drilling and closure of Operation East Yellowfin.

“The company has delivered cost-efficiency measures – recording declining extraction costs – and increased production in the incorporated businesses,” they added.

As for 3R Petroleum, they argue that the company offers a more diversified portfolio of assets, with exposure to onshore and offshore fields, as well as “mid” and “downstream” operations.

“We see great potential in the recovery of signed concessions, but we report that the company is still in the early stages of this development. Furthermore, we emphasize that 3R is more sensitive to Brent prices, benefiting from an environment of high oil prices”.

For North American bank analysts, private Brazilian junior oil companies represent an attractive investment opportunity and investors should position themselves in both PRIO and 3R.

“These companies offer different risk-return profiles, which can add value to the portfolio; and even if one company is preferred over another, we welcome diversification into multiple regions/assets to mitigate each company’s concentrated risks,” they said in the report.

The “level-changing” production confirms a positive view

Also on 3R, the company announced that its production in December 2022 was 25.3 thousand barrels per day compared to 13.1 thousand in November 2022, an increase of 93%.

The main impact on production is due to the consolidation of the Papa-Terra Complex, with a production of 9.2 thousand barrels. Attention also to the return of production to Macao and the hubs of Rio Ventura and Recôncavo.

“December production data was broadly positive and the company appears to be on track to deliver an average production of 45,000 barrels of oil equivalent per day for 2023 as discussed by management during the third quarter. Production should reach this level in 1Q23 with the consolidation of Polo Potiguar (+18,000 barrels) and the full consolidation of Papa Terra (+8,000 barrels) considering only 9 days of production in December”, Bradesco BBI states. The bank has a recommendation far surpass (performance above the market average, equivalent to purchase) for the stock, with a target price of 103 reais, ie a 163% increase compared to yesterday’s closing.

Itaú BBA analysts see the completion of works in the Recôncavo cluster, the firm’s confirmed expectation to conclude pipeline works in Macau during 1Q23 and the successful incorporation of Papa-Terra into its offshore portfolio as main positives.

“December’s production increase helped to partially close the gap for the certificate of proved and probable reserves (2P), ending the year 13% below the forecast for 2022 (without considering Papa- land)”, underlines the bank. BBA recommended far surpass with a target price of BRL 105.18 for 2023, i.e. a potential appreciation of 170% compared to the previous closing date.

The analysis team of Levante underlines that, with the consolidation of Papa-Terra, the production of 3R takes a new leap and changes level.

December production (25.3 kboed) was 185% higher than January (8.9 kboed), driven by consolidated assets throughout the year. “For the beginning of 2023 we still expect the consolidation of Polo Potiguar, the largest asset acquired by the company and which will significantly increase its production”, evaluate the analysts of the house.

Furthermore, the recovery of production in the complexes in difficulty was positive. Polo Macao is still performing below expectations, which should be normalized after the interventions that have been carried out in its fields. At the Recôncavo Pole the interventions that already presented the major ones were completed in early December
production since the company began managing the asset.

Analysts also highlight the change in the company’s board earlier this year, which is now beginning to focus entirely on the relaunch and redevelopment of acquired and merged assets. The changes have been well received by the market, with the RRRP3 card showing an increase of around 20% from the 4, when the announcement was made.

“We reiterate our buy recommendation for paper, which should benefit from a flow from Petrobras (PETR3;PETR4), due to its political risk, a structural thesis in oil and lower perceptions of operational risk as the company increases its track record (historical) ”, underlines Levante.

According to the Refinitiv consensus, the eleven analyst houses covering the RRRP3 stock have a buy recommendation for the asset, with an average target price of R$ 89.87, which corresponds to a potential upside of 130% compared to the close of the market the day before, with analysts seeing the stock more than double in value.

(with Reuters)

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