If Prates’ ownership in Petrobras (PETR4) was already certain, why did the stock react so badly?

Do you fall for the rumours, do you stand up for the fact? This was not the case for Petrobras shares (PETR3;PETR4) after the appointment of Jean Paul Prates as CEO of the state-owned company, late last Thursday morning (26). Quite the opposite.

Yesterday, even before Prates officially took office, Petrobras shares had already lost steam by late morning and started to slide, with both share classes closing around 2.7%, despite oil’s rally during the day. This Friday, the move continued, with ON assets ending the day down 2.27% (R$28.90) and PN assets down 2.21% (R$25.62). Shares fell for most of the session, even as oil posted gains (the commodity finished with a loss on Friday).

This despite the fact that his appointment as managing director was already envisaged (for the moment ad interim, but with effect from the next shareholders’ meeting). Lula announced his name as a candidate for the position on December 30, and even earlier Prates’ name was considered the most likely to take over the state-owned company, which raised fears of an increase in capital investment and a decrease in investment. However, since then and up to 25, the preferred stock has increased by 10%.

Although the market did not expect the name to be rejected by the Board the day before, some “details” of Prates’ approval ended up having a negative impact on the market. The fact that his name was unanimously approved may have reduced investor confidence that the current board will deliver the checks and balances investors have come to expect, according to BTG Pactual.

“In our view, this leaves room for further rumors on (i) pricing policy, (ii) dividend distribution policy and (iii) capex plan (capital investment) in the coming weeks,” the analysts underlined the house. According to them, the general inability to map out a clear strategy for the company has hampered the market’s ability to reach a conclusion about the stock’s current fair multiples.

Analysts point out that “the best-case scenario for Prates” has occurred, as he was named chief executive officer within thirty days of his appointment. “Now that this has materialized, we believe it can more quickly define the new members of the Petrobras management team, although we emphasize that all appointments will also have to be approved by the company’s internal committees,” they assess.

Prates’ first video speeches to employees have already shown a major shift in strategy for the state-owned company, which has spent the past few years selling several assets to focus on its most profitable offshore oil fields and boost dividends. He said he sees the oil giant as the main driver of Brazil’s energy transition, but said he will also work for the company to continue its journey in the oil and gas industry.

The appointments of directors and councilors should also go in this direction. According to the newspaper O Estado de S. Paulo, Prates plans to create a new council dedicated to energy transition and renewable energy. If confirmed, there would already be a strong name to hire him: UFRJ professor Maurício Tolmasquim, former president of the Energy Research Company (EPE).

According to Reuters, the current CEO of the state-owned company had meetings with various wings of his party in recent days to close out his list of candidates for the state-owned company’s board. Prates also spoke to market leaders, academics and Petrobras, seeking guidance on composing the company’s board of directors.

The meetings, according to the agency, underline that the PT will have the final say on the choice of advisers, with PSB deputy president Geraldo Alckmin having little say, even though Lula’s deputy has met with some candidates, according to the agency . Parties such as the PCdoB and the so-called Centrão would also like to name names, but the majority of candidates must come from the president’s party.

Therefore, these indications have generated more impact for the actions, both for the vision of dedication to the energy transition and less in the lucrative strategy of recent years, and for the indications of the PT, amid greater fears of state intervention.

«Now, as commander of the state-owned company, the former PT senator should start naming the company’s top management. The expectation is that some will be announced within this week, so that they can already be evaluated by the internal committee. Other initiatives are expected by the market, mainly in relation to the implementation period, so that there are no drastic changes in the company’s strategy”, underlines Levante Ideias de Investimentos.

Prates, who is against Petrobras’ (PPI) current pricing policy, takes over the same week the company announced its first fuel price adjustment of the year, by 7.4%, Levante points out. The increase, announced on Tuesday (24), brings some relief to the market, even if it hasn’t filled the gap with the price on the international market.

According to Abicom, yesterday the petrol delay at the Petrobras Poles (26) was 4%, or R$ 0.13 per litre.

Levante also reiterates the main points of uncertainty for Petrobras for this year: i) pricing policy; ii) capital allocation; iii) divestment policy; and iv) dividend policy.

“The current expectation is that there will be a change in pricing policy, no longer broadcasting international market increases, but still no further indication of how the new price would work, other than changes in capital allocation, increased investment, mainly in refining, putting an end to divestments and the huge distribution of dividends”, underlines Levante.

The fuel price stabilization fund, one of the ideas defended by the new Petrobras president, is also not well received by many market analysts. While it has no direct impact on Petrobras, the challenge of getting this fund into the federal budget is a major source of investor concern.

Earnings on the radar

More specifically on Petrobras’ dividends, analysts at Bradesco BBI argue that, if approval of new Petrobras board members is done quickly by the state-owned company’s board, dividend payments for the fourth quarter of 2022 (4Q22) could be under threat.

“All names will need to be ratified by the Petrobras board of directors in accordance with the company’s governance rules. If management changes are approved quickly, this could pose a threat to the 4Q22 dividend,” they pointed out.

However, they estimate that it is unclear how quickly the new president of the state-owned company will make changes in the administration, highlighting reports alternating between Prates’ intention to change Petrobras’ board quickly and information that the changes should be gradual.

Looking ahead, BTG points out that, assuming the current dividend policy (60% of operating cash flow less capex), the stock would trade at a dividend yield (value of the dividend in relation to the share price) by 23% in 2023.

“Our base case scenario is that Petrobras will go back to growth mode and will need to scale back payment, or payment in relation to profit (Prates has publicly defended this before). like any payment above 55% of earnings would imply little or no reduction in the par value of dividend payouts, we believe it is fair to assume that the company will pay out somewhere between 25% and 50% of earnings in 2023, which would imply a dividend yield between 9% and 19%”, points out the bank.

According to analysts, an argument could be made that this theme could offer relevant support for the story, but it is not too far off from many of its global peers and other commodity names in Brazil – Vale, for example, trades between 10-11% . Therefore, the bank continues with an asset-neutral recommendation.

For them, recent foreign inflows into Brazilian equities and rising oil prices are the main drivers of recent Petrobras’ more “technical” performance (flow) relative to the market, with equities rising.

“This could go on for a while yet, particularly as we remain bullish on oil prices. But we note that high oil prices will eventually increase fuel price pressures in Brazil, thereby increasing the political noise around the company’s fuel pricing policy. Based on messages from Brazil’s new government, investors should expect dramatic changes at the country’s largest state-owned company. Even if we do not rule out a scenario where pragmatism outweighs this narrative, betting on it is extremely risky, in our view,” they assess.

Along the same lines, Goldman Sachs stresses that it is cautious with the company, although it sees the valuation as attractive. “We recognize the growing uncertainty about the policies to be adopted in the coming years”, they reiterate.

Citi, in turn, maintains a buy recommendation for ADR (receipt of shares traded on the New York Stock Exchange), with a target price of $19 for the PBR asset, but stresses it sees risks to the case investments in the state-owned company with Targhe. Analysts cite changes in the company’s long-term strategy and uncertainty about its future capital allocation.

“One of the most important areas of discussion, in our view, is the company’s future dividend policy, which could converge to as low as 25%. In this scenario, we see the shares trading at a dividend yield of around 9%, implying potential downside risks to the share price,” they pointed out.

It should also be noted that fears about changes in the law on state-owned companies are still on the radar of the markets. This Friday, Folha de S. Paulo reported that President Luiz Inácio Lula da Silva is counting on the STF and Congress to change the legislation, opening space for the appointment of politicians in state-owned companies, which raises concerns about corporate governance.

According to a compilation of case analyzes by Refinitiv, of the twelve houses covering the state company’s PN shares (PETR4), three have a buy only recommendation, eight have a neutral recommendation and one has a sell recommendation, demonstrating that more and more Market analysts are cautious with the investment case in the state-owned company.

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