Idea of the Week: Locking in 5–7% Yields on a Global Energy Leader

Supported by an accelerated production ramp-up, Petrobras continues to demonstrate earnings durability despite lower global Brent prices. In 3Q25, EBITDA grew 2.2% YoY, with margins holding steady at approximately 50%.

Operating cash flow remains robust, averaging approximately USD 39.5B annually over the past five years, comfortably absorbing the recent step-up in capital expenditure. Strong EBITDA-to-operating cash flow conversion continues to support consistent, positive free cash flow across the cycle.

Debt levels remain manageable with low near-term financing risk. Total liquidity of approximately USD 13.3B fully covers short-term maturities, providing a meaningful buffer. Credit metrics have also remained broadly stable in recent quarters.

Petrobras’ 2030–2035 USD bonds offer attractive value, with yield-to-worst in the mid-5% to 6% range. This represents a notable yield pickup versus bonds from international oil majors with similar tenor.

Petróleo Brasileiro S.A. (“Petrobras”) is a Brazilian state-controlled, integrated energy company and one of the world’s largest oil and gas producers. The Brazilian federal government maintains a controlling interest, holding approximately 50.26% of voting common shares as of December 2025, while the company’s equity is publicly traded on B3 (Brazil) and the NYSE (USA).

The Group plays a central role in Brazil’s energy sector, producing roughly 90% of the country’s oil and gas. Its operations include 11 refineries with a net distillation capacity of 1.851 million barrels per day, representing nearly 80% of Brazil’s total refining capacity. This positions Petrobras as a critical participant in the nation’s fuel supply chain.

Petrobras operates through three principal business segments:

Exploration & Production (E&P): The primary driver of operating income, focused on Brazil’s high-productivity deepwater and ultra-deepwater fields.
Refining, Transportation & Marketing (RTM): Manages the majority of the country’s refining and fuel distribution infrastructure.
Gas & Low Carbon Energies (GLCE): Oversees natural gas, power generation, and early-stage renewable projects, reflecting the company’s gradual transition toward a lower-carbon portfolio.

The Group generates approximately 70–75% of its revenue from the Brazilian domestic market, primarily through the sale of refined products. The remaining 25–30% is largely derived from international exports, where China, Europe, and the US make up the bulk of export volumes.

Productive wells + Cost advantage = Operational dominance

Petrobras sits at the centre of Brazil’s energy story, dominating the Pre-salt region — an offshore reserve off Brazil’s coast that has delivered some of the most significant oil and gas discoveries of recent decades. This advantage is not merely geological but also regulatory. Brazilian regulation confers on Petrobras the right of first choice over the most prospective oil blocks and secures its role as operator with a minimum 30% interest (An operator acts like the project manager, effectively overseeing the day-to-day management, technology, and execution of a project).

This dominance translates into a superior operational advantage for Petrobras. Unlike US shale, which depends on continuous drilling across numerous wells to sustain output, the pre-salt is defined by a handful of vast, high-pressure reservoirs that generate large volumes for extended periods. The result is exceptional productivity for Petrobras’ wells, with materially higher oil flow rates and barrels per day supporting a robust volume production.

Cost advantage further reinforces this moat. Petrobras has compressed average lifting costs to roughly USD 6–7 per barrel in 2025, reflecting its proprietary deepwater expertise and strong operating leverage. While offshore developments require substantial upfront capital, these costs are largely fixed. The exceptional flow rates of pre-salt wells spread costs across millions of barrels, lowering lifting cost low and, by extension, total cash costs per barrel (Chart 1).

This low cash cost profile provides a substantial margin of safety, which allows Petrobras to remain cash-generative even during oil price downturns. It also allows Petrobras to operate with a project breakeven costs at around USD 20 – 30 per barrel, lower than the USD 30 – 40 per barrel range common among global oil majors (Cash cost is the total cash outflow required to run the well. Project breakeven costs is the total cash outflow required to run and build the well).

Petrobras appears well-positioned to sustain its dominance in the pre-salt region. The 2026–2030 Business Plan underscores an aggressive strategy, with USD 69.2 billion allocated to Exploration & Production, of which 62% is specifically directed to pre-salt fields. This commitment signals a clear intent to accelerate development and production, effectively reinforcing Petrobras’ operational dominance in the region before any potential regulatory shifts could invite new competitors.

Chart 1: Low lifting costs keep total cash cost per barrel low

3Q25 results demonstrate revenue resilience despite softer oil prices

Petrobras posted a resilient 3Q25 performance in USD terms under IFRS. Even as average Brent prices declined roughly 14% year-over-year, the Group nudged revenue higher to USD 23.5B (3Q24: USD 23.4B), underpinned by a remarkable 17% YoY surge in total hydrocarbon production reaching a record 3.14 million barrels of oil equivalent per day (Chart 2). This was fueled by the accelerated ramp-up, specifically the "crown jewel" fields of Búzios and Mero.

Operationally, Petrobras delivered modest growth in core metrics in 3Q25, sales revenue rose 0.5% YoY, while EBITDA expanded 2.2% YoY, sustaining a stable EBITDA margin near 50% (3Q24: 49%) (Chart 3). This underscores the Group’s operational advantage to scale production while keeping lifting costs low, which provides a natural hedge against oil price volatility, supporting revenue stability.

Despite resilient operating performance, net income (excl. one-offs) declined 4.4% YoY to USD 5.2B (3Q24: USD 5.5B). We do not view this as a red flag, as the decline primarily reflects higher non-cash and finance expenses — investment-driven costs associated with bringing high-value production assets (e.g., FPSO units) online rather than signs of operational weakness. Higher non-cash charges were largely a byproduct of bringing new assets online, particularly FPSO units, which increase depreciation and amortization. Concurrently, the leasing of these vessels added to recognized lease liabilities, increasing finance expenses.

(A Floating Production, Storage, and Offloading (“FPSO”) unit is a floating facility used by the offshore industry to process, store, and transfer hydrocarbons produced from nearby wells)

Chart 2: Strong production volume in 2025…

Chart 3: … has supported revenue despite lower oil prices

Strong and efficient cash flow generation

Petrobras's operating cash flow (“OCF”) remains robust, standing at USD 25.9B for the nine months ended 30 September 2025. While this was lower than last year’s OCF (9M24: USD 29.8B) due to softer global oil prices, higher production volumes helped cushion the decline. Crucially, Petrobras maintains strong and efficient cash conversion (Charts 4 and 5).

The Group consistently converts a high proportion of EBITDA into operating cash flow—averaging 85% historically and reaching 84% in 3Q25. Free cash flow conversion is similarly robust, averaging around 60%, with 3Q25 at 42% (lower in recent quarters due to higher CAPEX intensity), well within the 35–45% range observed among global oil majors. The high conversion shows that Petrobras can efficiently operating profits to free cash flow, even after capital expenditure.

Looking ahead, cash generation remains well supported. Petrobras benefits from one of the lowest cost structures in the global oil and gas sector, with lifting costs expected to remain below USD 6 per barrel over 2026–2030. This keeps cash margins wide even if oil prices fluctuate. At the same time, production growth provides an additional tailwind, with output projected to peak at around 3.4 million barrels of oil equivalent per day in 2028–2029. Higher volumes combined with wide cash margins per barrel should continue to support OCFC moving forward. The Group projects OCF of USD 35 – 42B over the next five years.

Management is guiding to a sustained period of elevated cash CAPEX of around USD 17 - 21B per annum over the next five years (around USD 2.5 to 6.4B increase from FY24 cash CAPEX). However, we expect Petrobras to remain free-cash-flow positive, supported by strong cash generation and a planned dividend reduction. For comparison, the Group has generated an average annual OCF of approximately USD 39.5B over the past five years, sufficient to absorb the planned CAPEX. That said, the Group’s strategic priority on growth may limit the scope for meaningful deleveraging moving forward.

Chart 4: Petrobras converts a high portion of EBITDA to free cash flow despite recent higher CAPEX intensity

Chart 5: While CAPEX increased, operating cash flow remains robust, and free cash flow remains positive

Debt rose modestly, but leverage profile remains manageable

Petrobras’ gross debt rose by about USD 2.6B to USD 70.7B as of end-Sep ‘25 (end-Jun ‘25: USD 68.1B). However, the increase is largely accounting-driven rather than the result of new borrowings. Under IFRS 16, long-term lease commitments are recorded as debt. As Petrobras has commissioned additional FPSOs to ramp up production growth over the past year, the future lease payments for these assets show up on the balance sheet as higher gross debt (Chart 6).

Despite the increase, we do not view the higher gross debt as a red flag and consider Petrobras’s leverage profile to remain manageable. Importantly, the added “debt” is directly linked to income-generating assets. The FPSOs being leased are deployed to Petrobras’s most prolific and profitable fields, Búzios and Mero - the ultra-deepwater fields that serve as the Group’s highest-margin cash engines. Stripping out leases, Petrobras’ financial debt (i.e., bonds and bank loans) sits at a lean USD 28.1B - a massive retraction from the USD 63.0B peak in 2019. In effect, the Group has traded traditional 'financial leverage for operational leverage tied to productive assets.

Liquidity also provides a strong buffer. Petrobras is sitting on approximately USD 13.3B in available liquidity (USD 11.6B in cash and cash equivalents + USD 1.7B in related credit lines). This covers a significant portion of total financial debt (USD 28.1B) and the entirety of short-term gross debt (USD 12.1B), mitigating immediate financing risks. Beyond that, the debt maturity profile is favourably back-loaded, making funding needs manageable over the next 5 years (near 70% of maturities are after 2030).

Overall, Petrobras’ debt metrics have remained broadly stable since 2Q25. As of September 2025, net debt to EBITDA was approximately 1.5x, in line with major global oil companies. EBITDA interest coverage remained strong at around 18.4x, while free cash flow coverage of interest—after mandatory dividends—stood at approximately 3.4x. The company also maintains a debt-to-capitalization ratio below 50%, underscoring a prudent capital structure. Collectively, these indicators suggest that the balance sheet is stable, with a moderate leverage profile.

Chart 6: Gross debt rose as of 9M25 due to higher leases rather than financial debt

Table 1: Debt metrics (end ’22 to end-Sep ’25)

Metrics	Dec '22	Dec '23	Dec '24	Jun '25	Sep '25
Gross debt (USD Bn)	53.8	62.6	60.3	68.1	70.7
Cash (USD Bn)	12.3	17.9	8.1	9.5	11.7
Net Debt/ LTM EBITDA (x)	0.6	0.9	1.3	1.5	1.5
Debt/ Capitalisation (%)	43.5%	44.2%	50.4%	48.0%	46.9%
LTM EBITDA interest coverage (x)	28.0	23.2	18.8	18.6	18.4
Free cash flow* interest coverage (x)	6.8	7.5	6.0	5.0	3.4
Source: Bloomberg, iFAST compilations. Data as of 30 September 2025 Mandatory dividends subtracted from FCF*

Credit rating capped by sovereign ceiling, but standalone rating suggests an Investment-Grade caliber

Petrobras presents a classic "Sovereign Ceiling" case where its credit profile is artificially capped by political risk. Fitch assesses the Group’s standalone issuer credit profile at ‘BBB’; however, this is lowered to ‘BB’ to remain aligned with the Brazilian sovereign. Petrobras has a ‘BB’ rating from S&P Global Ratings and a ‘Ba1’ rating from Moody's.

The downgrade follows the framework for Government-Related Entities, which assumes that, in periods of stress, the controlling shareholder may draw on Petrobras’s resources (i.e., higher dividends or fuel-price intervention) to support public finances. In our opinion, Petrobras is an issuer with investment-grade fundamentals but wears a speculative-grade label.

Risk considerations

Political exposure remains a risk consideration for bond investors. State control creates the possibility of government influence through board appointments, which can steer corporate strategy toward broader public-policy objectives at the expense of pure profit maximization. There is also pricing risk, as Petrobras may face pressure to restrain domestic fuel prices to help manage inflation. These risks are inherent in a state-controlled structure.

That said, we view the likelihood of renewed pricing intervention as relatively low. Petrobras now operates with bylaws and a governance framework (Table 2) that act as guardrails against excessive political interference and, in doing so, provide an added layer of indirect protection for bondholders.

Brent pricing also represents a risk consideration, with a more direct bearing on Petrobras’ profitability and balance sheet trajectory. The Group estimates a Brent breakeven for net-debt neutrality of approximately USD 59 per barrel in 2026, declining to USD 48 per barrel by 2030. These levels represent the oil prices required to prevent an expansion of the debt base while funding planned investments and distributions. Should Brent prices fall below these thresholds, Petrobras would likely need to increase leverage to execute its capital program, introducing greater balance sheet pressure.

Table 2: Petrobras’ safeguards against government influence

Safeguards	Description
Legal protection	A "Reimbursement Clause" which explicitly states that if the government directs the Group to pursue "public interest" goals that differ from market conditions, then the former must reimburse the company for the difference in every fiscal year.
Fair decision-making procedure	A minority shareholders committee will assess any transactions with the controlling shareholder (the government) that fall outside the ordinary course of business. These transactions will require approval by two-thirds of the Board of Directors. The supermajority approval would therefore require the support of at least some independent or minority-elected directors.
Board Independence and qualification requirements	Bylaws require that at least 40% of the Board of Directors be composed of independent members, which is higher than the 25% minimum required by the State-Owned Companies Law. Technical experience requirements and integrity background checks are required for executives to prevent political appointees without industry expertise.
Source: Petrobras Bylaws, iFAST compilations

Recommendations

Table 3: Petrobras’ USD fixed rate bonds

Issuances	Ask Price	Yield to Maturity	Years to Maturity	Z-Spread (bps)
PETBRA 5.125% 10Sep2030 Corp (USD)	99.1	5.4%	4.6	190.2
PETBRA 5.600% 03Jan2031 Corp (USD)	101.3	5.3%	4.9	184.1
PETBRA 6.500% 03Jul2033 Corp (USD)	104.3	5.7%	7.4	213.1
PETBRA 6.000% 13Jan2035 Corp (USD)	100.2	6.0%	8.9	224.5
PETBRA 6.900% 19Mar2049 Corp (USD)	100.0	6.9%	23.1	285.8
Sources: Bondsupermart, iFAST Compilations. Data as of 10 February 2026

Petrobras’ credit profile remains stable into 3Q25, supported by strong cash flow generation, ample liquidity, and resilient credit metrics, alongside continued operational improvements. While the issuer carries a ‘BB’ rating, we view Petrobras’ standalone fundamentals as consistent with an investment-grade (“IG”) credit.

We prefer Petrobras’ 2030 to 2035 USD bonds as they offer good value and attractive yields in a declining rates environment, with yield-to-worst in the mid-5% to 6% range. In particular, Petrobras 5.125% of 2030 offers great value, with a high yield pickup (higher Z-spread) despite a shorter tenor.

Petrobras' bond pricing continues to reflect high-yield risk premia rather than its underlying credit strength. As a result, Petrobras’ bonds tend to offer compelling yield pickup over USD IG corporate bonds, with an estimated yield pickup of around 70 - 120 bps across tenors. The Group's bonds also trade at attractive spreads relative to global oil majors such as Shell, Exxon, Chevron, and BP (Chart 7), despite those peers carrying materially stronger credit ratings ('A+' to 'AAA' by Fitch).

Chart 7: Petrobras' bonds provide attractive yield pickup over peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities.

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Idea of the Week: Locking in 5–7% Yields on a Global Energy Leader

Productive wells + Cost advantage = Operational dominance

Chart 1: Low lifting costs keep total cash cost per barrel low

3Q25 results demonstrate revenue resilience despite softer oil prices

Chart 2: Strong production volume in 2025…

Chart 3: … has supported revenue despite lower oil prices

Strong and efficient cash flow generation

Chart 4: Petrobras converts a high portion of EBITDA to free cash flow despite recent higher CAPEX intensity

Chart 5: While CAPEX increased, operating cash flow remains robust, and free cash flow remains positive

Debt rose modestly, but leverage profile remains manageable

Chart 6: Gross debt rose as of 9M25 due to higher leases rather than financial debt

Table 1: Debt metrics (end ’22 to end-Sep ’25)

Credit rating capped by sovereign ceiling, but standalone rating suggests an Investment-Grade caliber

Risk considerations

Table 2: Petrobras’ safeguards against government influence

Recommendations

Table 3: Petrobras’ USD fixed rate bonds

Chart 7: Petrobras' bonds provide attractive yield pickup over peers

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities.

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