Morgan Stanley: Brazil Politics And Improved Oil Market Lifts Petrobas

Morgan Stanley’s Bruno Montanari upgraded the rating for Petroleo Brasileiro SA Petrobras (ADR) (NYSE: PBR) from Underweight to Equal-weight, while raising the price target from $2 to $5.60. Although Petrobas’ fundamentals have not improved as yet and its balance sheet continues to pose a risk, improving investor sentiment on oil markets is expected to support the company’s shares.

Macro-Political Developments In Brazil

Revelations in the ongoing Lava Jato investigation and numerous public demonstrations could lead to a political and economic transition in Brazil. Analyst Bruno Montanari added, “Given the existing depressed state of affairs in the economy, many investors believe that almost any change would be for the better.”

Shares of high-beta companies and leveraged players have surged significant in response to the recent events, and Petrobras is both high-beta and leveraged.

Oil Prices Improve

Brent prices have risen by 54 percent from the January lows. “We have seen many investors turning constructive on oil, expecting better supply discipline and accelerating global decline rates as a result of lower capex and drilling activity of infill wells,” Montanari wrote.

The EPS estimates for 2016, 2017 and 2018 have been raised from $0.58 to $0.81, from $0.56 to $1.03 and from $0.77 to $0.95, respectively. The estimates reflect strengthening BRL and “another year of refining gains with sustained gasoline/diesel premium in 2017,” the analyst said.