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A Segmental Analysis of Petrobas before 1Q16 Earnings

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PBR’s segmental analysis

Sinking oil prices have changed segment dynamics considerably for Petrobras (PBR). In 4Q14, the E&P (Exploration & Production) segment contributed $1.4 billion to its total EBIT (earnings before interest and taxes). This increased to $1.7 billion or 37% of EBIT in 1Q15. However, due to impairments and lower crude oil prices, the E&P segment reported a loss in 4Q15.

The Refining segment posted a loss in 4Q15. This was due to impairments in 4Q14, mainly led by the Comperj and RNEST (Abreu e Lima Refinery) refining projects. However, in 1Q15, refining contributed $3.2 billion, or 70%, of the total EBIT. But with impairments in the refining segment in 4Q15, the segment reported a decline in earnings to $0.88 billion.

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PBR’s 1Q16 outlook

In 1Q16, Petrobras (PBR) is likely to witness a decline in its upstream as well as downstream earnings. Brent prices, which averaged $54 per barrel in 1Q15, declined to $34 per barrel in 1Q16. This points to the likely fall in the company’s upstream earnings.

Earnings from the downstream segment are also likely to be subdued. This is because cracks have been under pressure in 1Q16. A point in case is the broader market crack indicator, the US Gulf Coast WTI 321 crack, which has fallen from $19 per barrel in 1Q15 to $10 per barrel in 1Q16.

The situation is similar for PBR’s peers that have already posted their 1Q16 earnings. Total’s (TOT) upstream segment, which contributed 48% of its total adjusted earnings in 1Q15, contributed 26% in 1Q16. Suncor Energy (SU) and BP (BP) reported losses in their upstream segments in 1Q16. Exxon Mobil’s (XOM) upstream segment, which contributed 58% of its total earnings in 1Q15, turned into a loss-making segment in 1Q16. The Vanguard High Dividend Yield ETF (VYM) has ~10% exposure to energy sector stocks.

In the next part, we’ll analyze Petrobas’s stock performance before it posts its 1Q16 results.

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