Petroleo Brasileiro

Where we land

Petrobras makes most of its money producing and refining oil, and right now oil is expensive. Brent, the international benchmark price for crude, stands at $114 a barrel. At that price the company keeps 35% of every sale as operating profit, meaning what is left after paying for the oil it sells and the costs of running the business.

We find it strikingly cheap. The shares trade at 5 times earnings, so a buyer pays five years of today's profit for a share. That is a price that already assumes profits shrink, and our view is that the shrinkage it builds in is steeper than the business is likely to deliver. We award it gold.

What the business is

The way the company's sales are classified tells only part of the story. Almost everything, 93% of revenue, falls into a single line for petroleum refining in the Americas. Gathering and processing services, mostly the handling and treatment of natural gas, account for 6%. A separate line for oil exploration and production rounds to nothing.

That last figure is misleading if taken literally. Petrobras pumps a great deal of crude from deep offshore fields off Brazil, and that production is folded into the large refining line rather than reported on its own. The company does not split pumping crude from refining it into fuels in this breakdown, which matters because the two earn very different returns.

What the breakdown does show is a business that converts sales into profit unusually well. Its gross margin, what is left of each sale after the direct cost of the product, is 47%. Over five years that margin has had a middle value of 48%. It has typically strayed only about 2 points either side of that, which is remarkably steady for a company whose main product swings in price as violently as oil does.

Why now

The immediate reason to look is the oil price. Brent has risen 62% over the past three months. Over a year it is up 65%. For a producer whose barrels are cheap to get out of the ground, a move of that size flows quickly into profit.

Professional analysts have been catching up. They have raised their earnings estimates 16 times in the last 45 days, without a single cut. On the underlying quality of the business, how much it earns on what it owns and how consistently, Petrobras is among the strongest companies we rate.

The one thing pulling the other way is growth. Measured against every listed company, its standing on growth has fallen sharply over the past year, which is the tension running through everything that follows. We have held it in our Conviction 10 portfolio since May 2026, and it still meets the requirements that put it there.

The case for

The strongest argument is the direction of the forecasts. Every revision analysts have made over the last 45 days has been upward, during a quarter in which crude climbed to $114 a barrel. When estimates move in one direction only, it usually means the people closest to the numbers are discovering that their earlier assumptions were too cautious.

Those assumptions remain cautious. The consensus still has earnings per share falling about 17% next year. This year's figure is 11.95. Next year's forecast is 9.94. The upgrades are making that decline less severe, but they have not yet erased it, which suggests analysts are treating today's oil price as a spike that will fade rather than a level that will hold.

That caution is understandable given the recent record. Sales rose 11.2% in the latest year, yet over three years sales growth is slightly negative. The company's growth standing slid from strong to below the middle of the market over six to twelve months, with the steepest step down in early August 2026. Forecasters anchored to that history would naturally project falling earnings.

Put those together and the case for is about the gap between expectation and reality. If oil stays anywhere near current levels, a forecast built on falling profits is likely to keep being revised up, and a share price set at 5 times earnings has a great deal of room before it reflects that.

Where the growth could come from

The oil price is what is moving Petrobras's earnings and shares right now. The company's most valuable assets are its pre-salt fields, deep offshore reservoirs that sit beneath a thick layer of salt and produce at low cost. When crude rises, very little of the extra revenue is absorbed by extra cost, so higher prices go almost straight to profit and to cash available for dividends. This is most likely what explains the run of upgrades. It sits mostly inside the large refining line, since the company does not report production separately there, and quarterly results showing realised oil prices and production profit rising in step with Brent would confirm it.

The biggest question is how much of that windfall reaches shareholders, and the answer runs through Brazilian politics. The state is the controlling shareholder, and when crude jumps this fast a gap opens between world prices and what Petrobras charges for diesel and gasoline at home. The government is tempted to have the company hold pump prices down, which shrinks refining margins and can damage investor trust. The sign that the company is handling it well would be fuel price increases that track import costs, with no political backlash or changes at the top.

A related tension is what happens to the cash. Surging cash flow meets pressure to spend on investment and national projects. Petrobras is owned largely for its payouts, and with the US 10-year government bond yield at 5.29% and rising, investors want higher cash returns from emerging-market shares to justify holding them. A large one-off dividend would support the shares, while redirecting money into low-return projects would weigh on them. Dividends rising with cash flow and debt held steady, rather than capital spending plans being raised, would show the balance tilting toward shareholders.

Volume could compound the price effect. New floating production units are coming online in large pre-salt fields such as Búzios, and more barrels sold at a high price means earnings can grow even if crude levels off. This is the main thing that could beat the expected 17% fall in earnings per share. Production reports showing output rising as new units reach full capacity on schedule would be the evidence.

Further out sits an option rather than an engine. The company is exploring off Brazil's northern coast, a region known as the Equatorial Margin, and building out its gas processing and pipeline business, which makes up the 6% line. The pre-salt fields will eventually mature, so a major northern discovery or a larger gas business would extend how long Petrobras can grow. Environmental permits and drilling results will decide whether any of it comes to something.

The case against

Begin with the very numbers that make Petrobras look exceptional. Its gross margin is 47%. The US and Canadian refiners it is grouped with, Marathon, Valero, Phillips 66, Imperial and HF Sinclair, earn gross margins of 8-13%. Even Ecopetrol, Colombia's state-backed oil company and the nearest comparison, reaches 31%. The company has averaged 48% with very little variation over 20 quarters and has been profitable in every one of them.

A gap that wide is not proof of a better business so much as proof of a different one. Most likely the margin reflects cheap crude production that the refiners simply do not have, which means Petrobras is far more exposed to the oil price than its peers. Profits that rest on crude at $114 are profits that can fall when crude does.

The valuation gap tells the same story from the market's side. At 5 times earnings Petrobras is the cheapest in its group, where peers trade at 10 to 21 times. It sits at half the multiple of Ecopetrol and HF Sinclair. Against the US refiners it is roughly a third. Its position as one of the cheapest and higher-quality companies in the whole market has been broadly unchanged all year, and that persistence is the uncomfortable part: investors have seen the same margins and the same low price for twelve months and have not closed the gap. A discount that stubborn usually reflects something real, and the obvious candidates are state control and the expectation of falling earnings.

The shares themselves have started to say so. Their upward run has cooled markedly over the past quarter, even as crude rallied, which is not what a market convinced by the windfall would do. The wider setting is also less friendly than the oil price suggests. Government bond yields in the US and the euro area are rising, with the US 10-year up over a point in a year, which raises the bar every share must clear. Petrobras also carries net debt equal to 0.7 times the value of its shareholders' equity, a load that becomes more expensive to carry as rates climb. A rerating needs more than expensive oil, and the other ingredients are moving the wrong way.

What the price assumes

One way to read a share price is to ask what it requires the company to achieve. Suppose the share price stays where it is for five years, and that by then the market values Petrobras like a typical profitable listed company, at 18.4 times earnings. For both of those to be true at once, earnings would have to shrink by 22% a year for five years.

Because earnings are positive but not growing steadily, the clearer test is where they end up rather than the rate of change. On that reading the price implies earnings per share of 2.93 in five years. If the current trend in operating profit simply continues, earnings per share arrive at 4.26. That is 145% of what the price requires.

Even that trend path is not kind. It still means earnings falling about 16% a year. The point is that the share price asks for a steeper decline than that, so a business that merely keeps sliding at its current pace would be doing better than the price assumes. The shares have risen 64% over the past year but only 4% over six months, so much of the oil-driven gain is already behind them, and the recent pause has left the low multiple in place.

The other side of the medal

The single risk that matters most is that Petrobras's profits rest on today's high oil price, and that the low share price may therefore be fair rather than generous. Everything good in this case, from the margins to the upgrades, leans on crude staying expensive.

The forecasts already point the other way. Analysts expect earnings per share to fall 17% next year. Sales rose 11% on a year ago, but over three years they have shrunk by about 2% a year. Growth ranks in the middle of the market and has slipped over the year. That is the profile of a company enjoying a strong year in a business that is not, underneath, expanding.

If that reading is right, a price of 5 times earnings is not a bargain but a reasonable valuation of profits that are about to fall. The signs it was arriving would be crude retreating from its peak, the stream of upward estimate revisions turning into cuts, and quarterly earnings dropping toward or below what analysts now expect.

What to watch

The next two quarterly results are the first test. If realised oil prices and production profit keep pace with Brent at $114, the forecast 17% fall in next year's earnings per share will look too pessimistic, and the gap between the price and the business's likely earnings would widen further.

The second test is whether the steadiness holds. If the gross margin broke out of the narrow band around 48% it has kept for five years, or the one-way upward revisions turned into cuts as the crude spike faded, our reading of a high-quality business priced too cheaply would be wrong. The low multiple would then look like what the sceptics already think it is: a fair price for falling earnings.

The numbers

The same industry, for comparison

Research for information, not personal investment advice or a recommendation to buy, sell or hold any security: see Important information. Data as at 30 September 2026.