Brazilian state-run energy giant Petroleo Brasileiro S.A. or Petrobras (PBR) is expected to release its third-quarter 2014 results on Friday, Nov 14.
In the preceding three-month period, Petrobras delivered a negative 25.00% earnings surprise – the third underperformance in the last 4 quarters – hampered by higher exploration expenses. Moreover, cap on pump prices, fixed by the government, impacted the company’s profit considerably. Let’s see how things are shaping up for this announcement.
Factors to Consider This Quarter
We believe that continued demand growth in Brazil (expected to outperform developed countries in the next few years), together with all the new investments and acquisitions, will fuel Petrobras’ medium-term earnings outlook. Additionally, we expect the company to benefit from its expertise in deep-water operations, its huge recent discoveries (which could double its resource base) and the growing domestic refined products market.
However, the Brazilian government, the company’s majority shareholder with a 54% stake, has a history of political interference in Petrobras’ affairs. As a result, despite the company’s expertise in deep-water operations, its huge recent discoveries and increase in oil production, Petrobras routinely incurs losses.
In particular, while the upstream business is doing fine, the downstream segment is a drag on the overall results. The government caps the prices of domestic refined products so as to meet the needs of the people. These price regulations do not allow Petrobras to pass high refining costs to consumers.
Earnings Whispers?
Our proven model does not conclusively show that Petrobras – whose shares have significantly underperformed other big oil companies like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) over the past three years – is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: Petrobras’ earnings ESP is 0.00%, as the Most Accurate estimate and the Zacks Consensus Estimate both stand at 30 cents.
Zacks Rank #3 (Hold): Petrobras carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
While an earnings beat looks uncertain for Petrobras, here is one energy firm you may want to consider on the basis of our model, which shows that it has the right combination of elements to post an earnings beat this quarter:
SandRidge Mississippian Trust I (SDT) has an Earnings ESP of +38.89% and holds a Zacks Rank #1 (Strong Buy).
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