Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR): Value Waiting to be Unleashed

We came across a bullish thesis on Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) on ValueInvestorsClub by natty813. In this article, we will summarize the bulls’ thesis on PBR. The company’s shares were trading at $14.80 when this thesis was published, vs. the closing price of $13.02 on Jan 03.

An aerial view of an oil and gas refinery, with its tall smoke stacks and complex piping.

Petróleo Brasileiro S.A. – Petrobras explores, produces, and sells oil and gas in Brazil and internationally. The company operates through three segments: Exploration and Production; Refining, Transportation and Marketing; and Gas and Power.

Even after discovering the largest pre-salt oil reserves in 2006, PBR suffered due to corporate governance issues and piling debt. The net cash flow was negative from 2007 to 2014. After the government passed the Law on the Responsibility of Federal State Companies, there has been a turnaround in PBR and the company has managed to generate free cash flows worth $85 billion in the last 12 quarters, which is almost equal to the market cap. Net debt levels have also been consistently dropping.

The ability to generate high cash flows also makes PBR a lucrative dividend investment. The dividends from 2021 to 2023 stood at $69.8 billion. The company is projected to provide double-digit dividend yields if the price of Brent remains stable at current levels. Even if the price drops from $70 to $40, the expected yield is 4.5%, which is still a generous figure.

Although PBR has a higher-than-expected production growth compared to its peers, its valuations imply that the market has not done justice to the stock. The stock trades at a P/E of 5.4x based on 2024 EPS and 3.2x EBITDA multiple. These numbers are significantly lower when forward estimates are considered. Its Free Cash Flow yield sits at 21% in 2024. As the company continues to generate superior ROIC, it is only a matter of time before the market takes notice and attributes an appropriate price to the stock.

While we acknowledge the potential of PBR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than PBR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.