Citi maintains neutral rating on Petrobras stock amid price cut

Citi analysts reiterated a Neutral rating on Petrobras (PBR) with a $12.50 price target following the company's 5.6% gasoline price reduction to distributors, the first change since July 2024. While the price cut, influenced by lower oil prices and domestic prices being 2% above international parity, could negatively impact Petrobras's revenue and EBITDA by an estimated $690 million annually, Jefferies upgraded Petrobras to Buy with a $15.30 target, citing cost-reduction efforts and a discounted valuation relative to peers. Petrobras's recent Q1 2025 results showed mixed performance, with upstream EBITDA rising but refining margins weakening, and a dividend declaration 7% below consensus estimates.

Analysis

Citi analysts have reiterated a Neutral rating for Petrobras (NYSE: PBR) with a $12.50 price target following the company's decision to reduce gasoline prices by 5.6% to distributors, from R$3.02/L to R$2.85/L, effective from Tuesday. This adjustment, the first since July 2024, is a response to lower oil prices and aims to bring domestic prices, previously 2% above international parity, below this benchmark. While this price cut is projected to negatively impact Petrobras's annual revenue and EBITDA by an estimated $690 million, the company maintains a substantial operational scale, evidenced by its $72.5 billion market capitalization, nearly $87 billion in annual revenues, and $34.4 billion in EBITDA over the last twelve months, alongside a "GOOD" financial health score per InvestingPro. Petrobras's recent first-quarter 2025 financial results were mixed: adjusted recurring EBITDA increased 8% sequentially to $10.7 billion, yet this was approximately 3% below Bloomberg consensus. The upstream division demonstrated robust performance, with adjusted EBITDA rising 50% quarter-over-quarter to $10 billion, supported by a 5% year-over-year increase in production. However, refining margins weakened, as adjusted EBITDA in this segment fell 29% quarter-over-quarter to $1.07 billion, attributed to lower plant utilization and contracting gasoline refining margins. The declared dividend of 0.909 Brazilian reais per share, totaling $2.04 billion, was 7% below consensus estimates. Analyst sentiment is divided: Jefferies upgraded Petrobras from Hold to Buy with a $15.30 price target, citing cost-reduction initiatives and a significant valuation discount (25% on enterprise value to debt-adjusted cash flow) compared to global peers. Conversely, Citi also initiated coverage with a Neutral rating and a R$35.00 price target, highlighting potential for robust dividends through 2025 but expressing caution due to oil price uncertainties. The stock currently trades below the analyst consensus range of $12.50 to $17.00, yet offers a significant 15.4% dividend yield and appears undervalued based on InvestingPro's Fair Value assessment.

Key Decisions for Investors

• Investors should closely monitor the impact of the recent gasoline price reduction on Petrobras's upcoming quarterly earnings, particularly on revenue and EBITDA figures, and assess the company's responsiveness to evolving oil price dynamics.
• Given the divergent analyst ratings (Citi's Neutral versus Jefferies' Buy) and the wide price target spectrum ($12.50 to $17.00), a thorough evaluation of Petrobras's risk-reward profile is warranted, balancing its attractive 15.4% dividend yield and potential undervaluation against oil price volatility and refining margin pressures.
• Consider the implications of the mixed Q1 2025 results, notably the strong upstream performance contrasting with weakening refining margins, and the dividend payout being below consensus, when evaluating the sustainability of future capital returns and overall financial health.