Wahoo And Peregrino Projects Will Improve Efficiency Despite Challenges

Key Takeaways

• Reduced lifting costs and increased production from the Wahoo project are set to improve efficiency and net margins.
  
• Acquisitions and resolutions enhance revenue and production capacity, with future buybacks poised to capitalize on stock undervaluation.
  
• Environmental and regulatory challenges, coupled with rising costs and integration issues, may hinder Prio's production, revenue growth, and financial stability.

Catalysts

Engages in the exploration, development, and production of oil and natural gas properties in Brazil and internationally.

• The anticipation of reduced lifting costs as production increases with the Wahoo project coming online later in 2025. This is expected to enhance production efficiency and potentially improve net margins.
  
• The acquisition of a 40% interest in the Peregrino field and the expected synergies, which could enhance revenue streams while potentially lowering operational costs over time.
  
• The resolution of environmental licensing issues that delayed the Wahoo project and TBMT wells, allowing Prio to expand production capacity significantly, positively impacting future earnings.
  
• The arbitration decision favorable to Prio in the Wahoo field, which consolidates the entire production and reserves to Prio, providing a platform for revenue growth and increased reserves.
  
• Future potential buyback programs to leverage the current undervaluation of its stock, enhancing earnings per share as additional cash flow is generated from operations.

Prio Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Prio's revenue will grow by 17.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 71.7% today to 37.9% in 3 years time.
• Analysts expect earnings to reach R$8.8 billion (and earnings per share of R$10.74) by about April 2028, down from R$10.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting R$9.9 billion in earnings, and the most bearish expecting R$7.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, up from 2.7x today. This future PE is greater than the current PE for the BR Oil and Gas industry at 8.4x.
• Analysts expect the number of shares outstanding to decline by 2.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.43%, as per the Simply Wall St company report.

Prio Future Earnings Per Share Growth

Risks

• The delay in environmental licensing, particularly with the Wahoo project, has hindered the company's ability to increase production, potentially impacting future revenue growth and operating efficiency.
  
• Rising lifting costs, exacerbated by the integration of Peregrino field at a higher cost per barrel, could pressure net margins if not offset by increased production or cost efficiencies.
  
• The company has seen a natural decline in production and operating efficiency issues across various fields, which if unresolved, could impact overall earnings and profitability.
  
• Increased leverage following the Peregrino acquisition could strain financial flexibility if not managed through effective integration and accelerated cash generation, potentially impacting net debt and EBITDA ratios.
  
• Regulatory challenges and delays in securing necessary approvals for drilling and repairs may continue to disrupt production and operational plans, affecting revenue stability and growth projections.

Valuation

• The analysts have a consensus price target of R$60.54 for Prio based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$70.0, and the most bearish reporting a price target of just R$47.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$23.2 billion, earnings will come to R$8.8 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 19.4%.
• Given the current share price of R$33.82, the analyst price target of R$60.54 is 44.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.