Fuel subsidies phase-out: Key Implications for Petrobras, Vibra and Ultrapar

Research evidence excerpt

Fuel subsidies phase-out: Key Implications for Petrobras, Vibra and Ultrapar

Forecast returns

Forecast price appreciation 58.9%

Forecast dividend yield 28.5%

Forecast stock return 87.4%

Market return assumption 18.6%

Forecast excess return 68.8%

Company Description

Controlled by the Brazilian federal government, Petrobras is Brazil's national oil

company. The company has a dominant presence in the Brazilian upstream and

downstream segments, being the largest oil producer in the country and holding most of

the refining capacity. The company's main assets and focus are its refineries in SP and RJ

and its pre-salt fields, such as Búzios, the largest deep-water field in the world.

Valuation Method and Risk Statement

Oil companies: 1) commodity price and domestic refinery gate prices for gasoline/diesel;

2) exploration risks associated with the business; 3) worse than expected drilling results;

4) steep increase in market risk aversion; 5) potential changes in tax regimes.

Integrateds:

Petrobras: We derive our price targets for PETR4 (PN) and PETR3(ON) from multiple/

SOTP-based valuation. We calculate our ADR price targets by dividing the local share

price target by the average forecast FX rate and multiplying by 2. The following are key

risks to Petrobras: 1) commodity price and domestic refinery gate prices for gasoline/

diesel; 2) execution risk, mainly in its E&P business; 3) capex discipline and returns from

new projects, mainly in downstream and other non- core areas; 4) the outlook for

Brazilian politics and economics and changes to Brazil's energy legislation.

Fuel Distribution:

Fuels distribution companies: 1) lower volume growth, due to weaker economy activity;

2) lower pace on regulatory changes and 3) other businesses headwinds, such as sugar &