Petrobras (PBR.A) Stock Falls Today on Morgan Stanley Downgrade

Petrobras (PBR.A) Stock Falls Today on Morgan Stanley Downgrade

By Andrew Meola|04/27/15 – 10:53 AM EDT

NEW YORK (TheStreet) — Shares of Petrobras  fell 2.24% to $8.71 in morning trading Monday after Morgan Stanley downgraded the Brazilian state-owned energy company to “underweight” from “equal weight” and reduced its price target to $8.50.

The firm said the company’s debt level is too high for its operating cash flow to support.

“Debt acceleration is no longer a threat and Petrobras is regaining access to debt markets. But fundamentals are not supportive with cash burn prevailing in the coming four years, as investments are expected to outpace operating cash generation by $6.0B on average,” the firm wrote in a research note.

“We agree that cutting capex and intensifying divestments contribute to deleveraging, but they are insufficient to completely fix the balance sheet,” Morgan Stanley continued.

Last week, Petrobras announced a $2.1 billion loss tied to a corruption and bribery scandal that has plagued it since mid-2014.

Separately, TheStreet Ratings team rates PETROLEO BRASILEIRO SA- PETR as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

“We rate PETROLEO BRASILEIRO SA- PETR (PBR.A) a HOLD. The primary factors that have impacted our rating are mixed – some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company’s strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including disappointing return on equity, weak operating cash flow and poor profit margins.”

Highlights from the analysis by TheStreet Ratings Team goes as follows:

• The revenue growth came in higher than the industry average of 20.3%. Since the same quarter one year prior, revenues slightly increased by 3.8%. This growth in revenue does not appear to have trickled down to the company’s bottom line, displayed by a decline in earnings per share.
• The debt-to-equity ratio is somewhat low, currently at 0.84, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.30, which illustrates the ability to avoid short-term cash problems.
• PETROLEO BRASILEIRO SA- PETR’s earnings per share declined by 21.7% in the most recent quarter compared to the same quarter a year ago. Stable earnings per share over the past year indicate the company has sound management over its earnings and share float. However, the consensus estimates suggest that there will be an upward trend in the coming year. During the past fiscal year, PETROLEO BRASILEIRO SA- PETR’s EPS of $1.70 remained unchanged from the prior years’ EPS of $1.70. This year, the market expects an improvement in earnings ($1.90 versus $1.70).
• Net operating cash flow has decreased to $6,413.00 million or 18.05% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, PETROLEO BRASILEIRO SA- PETR has marginally lower results.
• The company’s current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. In comparison to the other companies in the Oil, Gas & Consumable Fuels industry and the overall market, PETROLEO BRASILEIRO SA- PETR’s return on equity is significantly below that of the industry average and is below that of the S&P 500.