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Can Petrobras (PBR) Pull A Surprise This Earnings Season?


Brazilian state-run energy giant Petróleo Brasileiro S.A. or Petrobras PBR is set to release second-quarter 2017 results after the closing bell on Aug 10.

In the preceding three-month period, the Rio de Janeiro-headquartered integrated player delivered a positive earnings surprise of 214.29% on the back of higher oil prices and cost cuts.

Petrobras has a good earnings surprise history. It has topped estimates in three of the last four quarters. The company posted average positive earnings surprise of 59.58% in the trailing four quarters. Let’s see how things are shaping up for this announcement.

Petroleo Brasileiro S.A.- Petrobras Price and EPS Surprise

Factors to Consider This Quarter

Although crude and natural gas ended the second quarter of this year 8.4% and 5% lower respectively, the pricing environment of commodity prices was much healthier than the year-ago period, courtesy of the historical OPEC agreement. This bodes well for Petrobras’ upstream unit. Improving commodity prices are likely to augment the company’s revenues and cash flows. Further, Petrobras’ successful cost-reduction initiatives and efficiency gains are expected to cushion results further. Petrobras has also slashed its capex budget for 2017–2021 by 25%, which will enable the company to lower its debt load. Moreover, Petrobras’ aggressive divestment plans are also in sync with its strategy to reinstate investor’s faith in the stock, reduce the financial burden and increase focus on developing its core base of pre-salt fields. During the quarter, Petrobras announced plans to offload its 100% stake in the Jurua natural gas field in the Amazon region.

However, Petrobras’ involvement in the multibillion-dollar money laundering and bribery case has deteriorated the company’s credit rating to certain extent. The high leverage of 54% also remains a key area of concern for the firm. Also, in June, Petrobras cut prices of diesel by 2.3% and gasoline by 5.8% to protect its market share and attract buyers. This may adversely impact Petrobras' downstream division’s near-term results. Further, rising costs due to tougher RIN obligations is likely to weigh on the earnings and margins of the downstream unit of the company. The RIN expense has increased from $3.3 to $3.5 per barrel in the second quarter when compared with the year-ago quarter. As it is, shares of Petrobras have declined 18% during the second quarter, wider than the industry’s loss of 11%.

Earnings Whispers

Our proven model does not conclusively show that Petrobras will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate Estimate and Consensus Estimate are both pegged at 15 cents.

Zacks Rank: Petrobras currently carries a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, an ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates

While an earnings beat looks uncertain for Petrobras, here are some firms you can consider on the basis of our model, which shows that they have the right combination of elements to beat estimates this quarter:

Alibaba Group Holding Limited BABA is expected to release earnings results on Aug 17. The company has an Earnings ESP of +4.11% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Limited AVGO has an Earnings ESP of +2.57% and carries a Zacks Rank #2. The company is expected to release earnings results on Aug 24.

Atento S.A. ATTO has an Earnings ESP of +35.71% and carries a Zacks Rank #2. The company is expected to release earnings results on Aug 14.

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