SAO PAULO – Credit Suisse began coverage of PetroRio shares (PRIO3) with an outperform recommendation (performance above the market average) and a target price of R$25 per share, or a potential increase of 29% compared to the closing date of Friday.
Analysts estimate that PetroRio will increase production more than twice to reach around 78,000 barrels a day in 2025 and will reach US$ 1.27 billion in earnings before interest, taxes, depreciation and amortization (Ebitda, in its acronym in English). Mergers and acquisitions can further increase the upside, they point out.
PetroRio’s shares gained space in the portfolios of those who are optimistic about oil and have a very strong average liquidity, of around R$ 400 million per day throughout 2021.
The greater volatility expected for Petrobras (PETR3;PETR4) with the upcoming elections has also been seen as a favorable point for the independent oil company.
Read also: With a more volatile scenario in Brazil, Bradesco BBI sees PetroRio’s actions as a “hedge” in the oil and gas sector
Regis Cardoso and Marcelo Gumiero, analysts who signed the report, see that the oil company’s business model, which includes the acquisition and revitalization of mature fields, without exposure to exploration risks, is a good investment for direct exposure to oil and with potential for expansion.
The appraisal also includes PetroRio’s organic expansion, the connection between the Polvo and Tubarão Martelo (TBMT) fields, a new well in TBMT and the development in Frade and Wahoo.
“PetroRio achieves a very interesting combination of history both in mergers and acquisitions and in operations through a very successful strategy of synergies within the current portfolio, especially between Polvo and TMBT and Wahoo and Frade”, they point out.
For analysts, PetroRio can be considered a case of growth and the priority going forward should be around capturing cost synergies between Tubarão Martelo and Polvo, new well in TBMT 10, drilling in Frade, development of the recently acquired Wahoo field .
“We also see good potential for expansion with acquisitions, as PetroRio participates in the process of selling Albacora Leste and/or de Albacora, which are transformational opportunities for the company, but there are other opportunities that can add value,” analysts say .
Cash flow should be used primarily for short-term capital expenditures. The expectation is that by 2025 all projects will be operating and production will grow 2.5 times with a cash flow yield (cash flow yield, or cash flow per share over the current share price) of 20% per year if Brent prices stayed at $62 a barrel.
Going into valuation, analysts highlighted that the paper had an excellent performance in recent quarters. However, the upside potential they see can be explained by the fact that prices have not yet reflected the value generation of each of the projects as they are still in the early stages. “We also believe in the company’s capacity to grow inorganically, through mergers and acquisitions”, point out Cardoso and Gumiero.
Among the risks on the radar, analysts point out that the operation is closely linked to the price of oil. In addition, there are risks of accidents and cost control, since they are more concentrated than in other companies.
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