I do not think Petrobras (PBR) (PBR.A) needs any introduction. As one of the largest oil producers in the world, it offers excellent exposure to the increasing oil prices notwithstanding the tougher situation on the domestic markets where politics are playing an important role. The share price has been held back due to the political uncertainty as some presidential candidates seem to think Petrobras is making “too much” money but I think the incoming corporate taxes will alleviate these concerns. Just to put things into perspective, the in excess of $ 8B in corporate taxes owed over the 2021 results represent about 0.5% of the Brazilian GDP. In the current oil environment, the company already is some sort of golden goose for the government.
The Q4 results confirm Petrobras is a cash flow monster
In the fourth quarter of 2021, Petrobras reported a total revenue of just over $ 24B and a gross profit of $ 10.6B. That’s a little bit lighter than in the third quarter of 2021 but fortunately the company was able to cut some expenses elsewhere which resulted in an underlying operating income of $ 8.8B (excluding the $ 272M in reversal of impairments and the $ 1.2B in ‘other income ‘due to asset sales).
As you can see in the image above, the company’s interest expenses are decreasing very fast as the gross debt and net debt are decreasing which makes the company a better counterparty for the lenders as the balance sheet risks have now evaporated. The net income was approximately $ 5.64B which works out to be around $ 0.86 per ADR (considering one ADR consists of two shares and there are just over 13 billion shares and thus 6.5 billion ADRs outstanding).
Looking at the cash flow statement, Petrobras reported a total operating cash flow of $ 9.2B. We still need to take changes in the working capital position (aa $ 900M contribution) into consideration and we also need to deduct the $ 1.45B in lease payments as well as the $ 360M in interest payments into account. And finally, the company paid only $ 1.2B in taxes although about $ 2.27B is due on the Q4 results. Subsequently, we need to add back the almost $ 500M in dividends received from investors.
This results in an adjusted operating cash flow of $ 5.9B. The total capex was $ 1.7B resulting in a free cash flow of $ 4.2B. That’s approximately $ 0.64 / share.
That may sound disappointing but let’s not forget the fourth quarter was a capex-heavy quarter: Whereas Petrobras reported a depreciation expense of $ 2.91B, its total capex + lease payments came in at in excess of $ 3.1B. Additionally, the income statement was boosted by the (non-cash) reversal of previous impairment charges.
The dividend works out to be in excess of $ 1 / ADR
While the very strong free cash flow in the current oil price environment is a given, most shareholders are looking forward to seeing the dividend declarations. Back in December Petrobras was already very generous with a higher than expected dividend as it surprisingly hiked the December payment after posting stronger than expected Q3 results which made the pre-announced distribution look pretty low. And it looks like Petrobras will continue to be a generous dividend payer.
The company announced it will pay a dividend of 2,861 BRL per share. Considering each ADR consists of two underlying shares, the dividend per ADR will be 2 * 2.861 = 5.722 BRL per share. Using the current exchange rate of 5.15 this basically means a payment of $ 1.11 per ADR. Not bad for a quarterly dividend.
The ADRs will trade on an ex-dividend basis from April 14 forward, but the payment will only be made on May 23. That’s relatively late and I think we can expect a new dividend announcement before this Q4 dividend will be paid. Considering the stock will only trade ex-dividend in about six weeks from now, it could potentially be interesting to pick up stock on dips before the ADRs trade on an ex-dividend basis.
I usually do not like to make bold statements but in my article three weeks ago I was convinced Petrobras was on its way to make at least $ 10 / ADR in dividend payments within the next five years, even if one would use a lower oil price to calculate the free cash flow and dividend paying capacity. With a first dividend of approximately $ 1.11 already under the belt, I remain very confident in my projections, and that’s even using a lower oil price.
You could worry about declaring a $ 1.11 dividend while the Q4 free cash flow result was just around $ 0.64 / ADR. There are a few mitigating factors that help explain this. First of all, the Q4 dividend payment also seems to be partly a “catch-up” payment based on the full-year results: The FY 2021 free cash flow (on an adjusted basis) was in excess of $ 17B or $ 2.65 / share . Secondly, Petrobras also recorded a profit and a net cash inflow from asset sales. I did not include these in my underlying free cash flow calculation as asset sales are a non-recurring item. During Q4 2021, Petrobras recorded a cash inflow of approximately $ 0.30 per ADR from asset sales.
I would not count on future (quarterly) dividends to continue to exceed $ 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 getting too overweight) but I plan to maintain a sizable position in Petrobras for the time being.