This report is intended exclusively for:
fernando.siqueira@ infinityasset.com.br

Global Research
16 April 2020
LatAm Oil & Gas
Equities
Soon it should get better
Latin America
Oil Companies, Major
Updating our O&G coverage: we see value shift from equity to debt
Our investment thesis for the LatAm O&G coverage over the past few years was mainly
based on a value shift from debt to equity investors, supported by a higher oil prices,
leading to strong free cash flow generation, healthy dividends and deleveraging
balance sheet in some cases. After the oil price drop, we see discounted valuations for
most of our O&G coverage (ex-YPF), supported by 5-year Brent trading ~$50/bbl
which is consistent with UBS expectation of recovery, although we believe prices
will recover in time towards $60/bbl as a medium-term incentive price. We do
see short-term challenges, with value transference now from equity to debt investors,
but a clear sky mid/long term, with attractive current valuations and an oil price
rebound in the long run. Thus, we are upgrading ENAT and EC to Buy from Neutral and
maintaining our Buy rating in PBR and Canacol. On YPF we keep a Neutral rating.
Luiz Carvalho
Analyst
luiz.carvalho@ubs.com
+55-11-2767 6606
Gabriel Barra
Associate Analyst
gabriel.barra@ubs.com
+55-11-2767 6634
Majors: Concerns all around in the short-term
PBR: Despite the short-term challenges of lower FCF generation, higher leverage and
slow deleveraging, we think PBR has upside potential after its weak stock performance
since the oil price drop. We believe its current price does not reflect our long-term oil
forecast and lower break-even E&P cost, mainly in pre-salt assets. (Buy; PETR4 PT to
R$21 from R$34.) EC: We believe Ecopetrol is well-prepared to face the oil crisis and
the lower demand from the Covid-19 outbreak on the back of its strong cash position
along with the quick adjustments to its 2020-22 business plan. (Buy; PT to US$15 from
US$18.) YPF: The negative impact from lower oil prices should be offset in the shortterm due to the implementation of the creole barrel. However, in a longer-term view,
the measure is negative as it lowers attractiveness to international investors due to the
interventionist policy in the O&G industry (Neutral; PT to US$5 from US$11).
Juniors: Upgrade ENAT; CNE hedged from oil drop
ENAT: We think the stock has overacted to oil price movement, mainly given ENAT's
net cash of cR$1.45bn. Thus, we upgrade to Buy and drop our PT to R$13 from R$17,
still excluding the definitive system, with updated financials and 4Q19 results. CNE:
Canacol's strategy to move its production towards natural gas leaves it in a more
defensive position in moments of oil price collapse. Currently, close to 80% of CNE's
gas sales are "hedged" by take-or-pay contracts. (Buy; PT to CAD$5 from CAD$7.)
Figure 1: Rating and price target change summary
Company
PETR3
PETR4
PBR
PBRa
Ecopetrol
YPF
Canacol
Enauta
Old rating New rating
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Change
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Old PT
New PT
38.0
34.0
19.0
17.0
18.0
11.0
7.0
17.0
23.0
21.0
9.5
8.5
15.0
5.0
5.0
13.0
Change
Price as of
April 14
17.18
16.73
6.68
6.44
11.43
4.00
3.72
10.09
Upside
34%
26%
42%
32%
31%
25%
34%
29%
Source: UBS estimates
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From Equity to Debt
Our investment thesis for the LatAm O&G coverage over the past few years was
mainly based on a value shift from debt to equity investors, supported by higher oil
prices, leading to strong free cash flow generation, healthy dividends and
deleveraging balance sheet in some cases.
However, the sharp oil price drop may lead this path to the other way around. We
now see balance sheets being stressed, leverage going to much higher levels,
production cuts, lower cash generation, capex cut and so on, which will
compromise short-term returns.
UBS Global Oil team sees that the unprecedented decline in demand (UBSe 17.5mb/d y/y in 2Q20) means that a successful supply response is just a partmitigant in the short term. Even with the producers agreement to an arrangement
that results in short term market balance, underlying spare capacity will rise to
historic levels; and in any case, storage capacity (we estimate nominal remaining
storage capacity ~1.3bn bbls) is likely constrain supply by mid-year or earlier.
The scenario above and the geopolitical uncertainties lead to a lower visibility on
how companies will cope with a challenging environment ahead. This process
would lead companies to extend the debt maturity, cut dividends, raise additional
debt at higher costs and consequently shift value from equity to debtholders.
However, some may think that we would be negative with the investment cases
and this is not the reality. We see discounted valuations for Petrobras and
Ecopetrol, supported by 5-year Brent trading ~$50/bbl, which is consistent with
UBS expectation of recovery, although we believe prices will recover in time
towards $60/bbl as a medium-term incentive price.
In summary, we see short term challenges, but a clear sky mid/long term, despite
the value transference from equity to debt investors. We do not see relevant
liquidity issues for Petrobras and Ecopetrol. We do note YPF has a debt
amortization of US$1.6b this year, with a cash position of around US$1.2b and a
lower EBITDA generation (UBSe of US$2.7bn in 2020, 30% lower YoY).
We remain positive on Petrobras with Buy rating and PT of R$21/sh (PETR4) and
Canacol (CAD$5/sh). We become more positive and upgrade Ecopetrol and ENAT
to Buy from Neutral with new PTs of US$15/sh and R$13/sh, respectively. On YPF,
we continue to be conservative and maintain our Neutral rating, with a PT of
US$5/sh.
Figure 2: Rating and price target change summary
Company
PETR3
PETR4
PBR
PBRa
Ecopetrol
YPF
Canacol
Enauta
Old rating New rating
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Change
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Old PT
New PT
38.0
34.0
19.0
17.0
18.0
11.0
7.0
17.0
23.0
21.0
9.5
8.5
15.0
5.0
5.0
13.0
Change
Price as of
April 14
17.18
16.73
6.68
6.44
11.43
4.00
3.72
10.09
Upside
34%
26%
42%
32%
31%
25%
34%
29%
Source: UBS estimates
LatAm Oil & Gas 16 April 2020
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 2
Analyzing various scenarios of oil prices for our
LatAm coverage
In our previous two reports (Brace yourselves and Stress test to our LatAm
Coverage), we analyzed the potential impact of the global COVID-19 outbreak on
our LatAm coverage, with several types of sensitivity analysis about the downside
risks for O&G industry. COVID-19 and the oil price war have led O&G stock prices
to drop dramatically within 30 days.
As observed by UBS analyst Jon Rigby's team in Pricing oil for the toughest quarter,
COVID-19 demand effects are rolling across major global economies. We now
estimate 1H20 global demand down 11Mbd and 2020 down 7Mbd unprecedented in modern times. This assumes the effect of a rolling shut down of
the world's major economies over 1H and some residual effects in GDP and travel
(especially aviation) through 2H.
Due to the double effect from a supply and demand shock, UBS's global oil team
lowered its long-term Brent estimate to US$60/bbl from US$70/bbl. Now, we are
incorporating the changes into our models and changing our price targets, as well
as two ratings. Notably, most of our covered O&G companies have suffered with
the oil price decrease, which we view as fair movement, but we believe the
magnitude of some of these drops could be viewed as a buying opportunity.
Petrobras: Despite the more challenging scenario ahead, we believe upside
potential remains for PBR's stock price. We maintain our Buy rating while
decreasing our PETR4 PT from R$34 to R$21/share. We now see lower cash
generation, but still positive free cash flow, production growth is likely to be
delayed and also divestments will face some headwinds. All these points together
would lead a shift from debt to equity value. Our positive view comes from a
competitive free cash flow breakeven and higher oil prices in the mid/long-term.
We previously believed this thesis was likely to play out by mid-2021, when the
bulk of its divestment is completed. However, as we have discussed, with lower oil
prices, the deleveraging process could take more time than our previous forecast,
which may impact the company's risk perception among investors and will delay
more robust dividend payments.
Ecopetrol: EC's stock performance is the most correlated to oil prices among our
coverage, which explains its stock price fall since Brent prices suffered a hefty
decline. Although we believe lower oil prices may lead to higher risks in the
upstream segment, we think the company is well prepared to face the challenging
period. Ecopetrol has a strong cash position of US$3bn, and a good balance sheet,
with no relevant debts maturing this year, with no covenants from financings
obtained directly by Ecopetrol S.A and therefore, we see no risks in its liquidity.
In addition, its management was the first among our coverage to announce
adjustments to its business plan, adapting its capex guidance and costs to protect
its cash flow generation. Having that in mind, we upgrade the stock to Buy from
Neutral while decreasing our PT to US$15/sh from US$18/sh.
YPF: We see the creation of the creole barrel as a short-term positive impact for
YPF as it reliefs the upstream segment from the hefty decline in oil prices. We think
of US$40-45/bbl as a reasonable level, as YPF (a benchmark in terms of costs in the
country) has a breakeven of around US$40/bbl, and with prices above US$50/bbl,
refiners have their profitability negative impacted by higher costs. With an oil price
LatAm Oil & Gas 16 April 2020
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 3
reference of US$45, some investments led by YPF could return to try to offset part
of the fall of the previous months.
However, as the history shows, the measure is very negative in the long term as it
creates an artificial prices leading to inefficiencies in the industry and skepticism
with capex spending from international companies. Therefore, the measure is not
sustainable in the long-term, in our view.
It's worth reminding that in its 4Q19 conference call, YPF guided for adjusted
EBITDA of US$3bn, with capex of US$2.8bn, which we viewed as aggressive,
especially as it has US$1.6bn in short-term debt maturing in 2020 and a cash
position of around US$1.2b. Having that in mind, we see the company pressured
in terms of liquidity, with as the company should deliver have a lower EBITDA
generation due to the lower oil prices. That said, in our view, it will be crucial for
YPF to reduce capex if oil prices remain low. The company has 56% of its debt is
subject to covenants, in which the main ones are related to its net leverage ratio
(<3x) for the incurrence of additional debt and debt service coverage ratio (>2x).
Enauta: COVID-19 and the subsequent oil price war has led Brent and WTI prices
to collapse, and Enauta's stock price has fallen 40%, slightly less than Brent prices,
which fell more than 50%. We think the stock price has overreacted to the oil
price movement, mainly due to the company's financial position, with net cash of
cR$1.45bn.
Thus, we are upgrading our rating to Buy from Neutral, while decreasing our PT to
R$13 from R$17, while still not including the definitive system, with updated
financials (including the oil curve) and 4Q19 results. However, we acknowledge
the risks have increased due to the current oil price, supply-demand equation and
the discussion on PBR force majeure in Manati. Upside potential remains from the
definitive system and the possibility of farm-outs in 3 blocks (2 PAMA and 1 FZA),
but we view that as less significant.
Canacol: Canacol's strategy to move production towards natural gas has left the
company in a more defensive position in moments of oil price collapses. Currently,
close to 80% of CNE's gas sales are "hedged" by take-or-pay contracts. While
Brent and LatAm integrated companies dropped more than 60%, CNE fell "only"
40%. Despite the lower oil prices, we maintain our Buy rating, as we expect: 1) a
significant sales volume increase due to the completion of the Promigas pipeline;
2) the drilling of 12 wells as a result of its exploration program; 3) the Medellin
project, which may add 100MMcfpd by 2023; and 4) a recurring quarterly
dividend payment.
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 4
UBS Research
PIVOTAL QUESTION
return 
Q: How will oil prices impact LatAm oil and gas
companies?
R
UBS VIEW
O&G companies' stock prices have reacted negatively from dropping oil prices
and the impact on demand of COVID-19. For companies more correlated to oil
prices, such as Ecopetrol, the price action is likely to be more significant.
Meanwhile, a company such as Canacol is likely to be more defensive, as it is
less exposed to oil price variation due to its long-term gas sales take-or-pay
contracts. The impact on leverage and liquidity should not be ignored, given
the high level of debt at some companies, such as YPF.
EVIDENCE
Historically, Ecopetrol has presented the highest correlation among LatAm
Major O&G companies, at 89%, vs. 67% for PBR and -10% for YPF. Its higher
correlation in moments of oil price stress leads the company to suffer more
than others (EC has dropped c33% since the OPEC+ breakdown). The impact
of oil prices on companies' top lines is directly linked with upstream activity.
Thus, downstream business can be viewed as a hedge for integrated
companies. However, due to the lockdown period in LatAm countries,
including Brazil, Argentina and Colombia, the utilization ratio could drop at
the same pace as demand decreases, also impacting revenue and crack
spreads. The secondary effect is increased leverage metrics of O&G companies
due to lower EBITDA and FCF generation, which could impact short-term
capex. All the companies have announced or indicated that they are revising
their investment plans and opex projects for the current cycle.
WHAT'S PRICED IN?
We believe the market is forecasting its oil curve base on the future curve,
which prices the long-term oil price around US$50/bbl. Additionally, higher
volatility in global markets has increased risk perception; thus, O&G
companies, which are risky assets, have become less attractive.
Impact on LatAm integrated producers
Figure 3: Correlation of LatAm majors with Brent in 4 different time frames
Source: Reuters and UBS estimates
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 5
As we have discussed, lower oil prices are clearly negative for integrated oil
producers. As opposed to when the global team changed its forecast only for the
short term (link), we now see a different base case going forward, which is likely to
impact our investment theses more significantly (link).
EBITDA and FCF impacts
Among our coverage, some companies are more correlated to oil prices than
others. PBR, EC, YPF and ENAT have strong correlations with oil prices. Conversely,
as a defensive stock, Canacol may move very little due to oil price variations in
either direction.
Figure 4: PBR EBITDA sensitivity analysis (US$mn)
US$/bbl
20
30
40
50
60
70
2020
6,044
12,866
19,688
26,509
33,331
40,153
2021
7,698
14,792
21,885
28,978
36,072
43,165
2022
8,674
16,238
23,802
31,366
38,930
46,494
2023
9,609
17,833
26,057
34,281
42,505
50,729
Figure 5: PBR FCF sensitivity analysis (US$mn)
2024
10,014
18,702
27,390
36,078
44,766
53,454
US$/bbl
20
30
40
60
2020
2,443
4,444
6,445
8,445
10,446
2021
(4,353)
910
6,165
11,409
16,653
2022
(7,078)
(1,673)
3,715
9,074
14,434
2023
(10,557)
(4,787)
965
6,673
12,379
2024
(4,634)
1,549
7,713
13,817
19,915
70
12,447
21,897
19,794
18,078
26,004
50
Source: UBS estimates
Source: UBS estimates
Figure 6: EC EBITDA sensitivity analysis (US$mn)
Figure 7: EC FCF sensitivity analysis (US$mn)
US$/bbl
20
2020
2021
2022
2023
2024
(2,060)
(2,016)
(1,772)
(1,794)
(1,851)
30
US$/bbl
20
2020
2021
2022
2023
2024
(3,726)
(3,418)
(2,507)
(2,098)
(2,482)
(1,018)
(1,382)
399
730
745
732
30
(2,625)
(2,391)
(1,443)
40
2,009
2,815
3,233
3,284
3,315
40
(1,524)
(1,364)
(379)
50
4,044
5,230
5,736
5,823
5,898
50
(424)
(337)
60
6,079
7,646
8,238
8,362
8,481
60
677
70
8,113
10,061
10,741
10,901
11,064
70
1,778
(25)
61
(282)
685
1,141
817
690
1,749
2,220
1,917
1,717
2,813
3,300
3,016
Source: UBS estimates
Source: UBS estimates
Figure 8: YPF EBITDA sensitivity analysis (US$mn)
Figure 9: YPF FCF sensitivity analysis (US$mn)
2020
2021
2022
2023
2024
2020
2021
2022
2023
2024
20
1,913
(3,249)
(4,378)
(4,591)
(4,668)
20
(1,274)
(3,333)
(3,598)
(3,299)
(3,159)
30
3,338
(861)
(2,093)
(2,241)
(2,250)
30
(609)
(2,248)
(2,556)
(2,217)
(2,042)
40
4,762
1,527
191
110
169
40
56
(1,164)
(1,513)
(1,134)
(925)
50
6,186
3,915
2,476
2,461
2,587
50
720
(80)
(471)
(51)
60
7,611
6,303
4,760
4,812
5,006
60
1,385
1,004
571
1,032
1,309
70
9,035
8,691
7,045
7,162
7,424
70
2,050
2,088
1,613
2,114
2,426
US$/bbl
US$/bbl
Source: UBS estimates
Source: UBS estimates
Figure 10: CNE EBITDA sensitivity analysis (US$mn)
Figure 11: CNE FCF sensitivity analysis (US$mn)
US$/bbl
2020
2021
2022
2023
2024
2020
2021
2022
2023
2024
20
243
247
252
257
263
20
278
277
288
293
298
30
244
248
253
258
264
30
279
277
288
294
298
40
244
249
254
259
265
40
279
278
289
294
299
50
245
250
254
260
265
50
280
278
290
295
300
60
246
250
255
260
266
60
280
279
290
296
301
70
247
251
256
261
267
70
281
280
291
296
301
Source: UBS estimates
LatAm Oil & Gas 16 April 2020
US$/bbl
192
Source: UBS estimates
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 6
Figure 12: ENAT EBITDA sensitivity analysis (R$mn)
US$/bbl
20
30
40
2020
91
310
528
747
965
1,184
50
60
70
2021
31
231
432
632
833
1,033
2022
(14)
172
358
544
730
916
Figure 13: ENAT FCF sensitivity analysis (R$mn)
2023
(48)
129
306
483
660
836
2024
(98)
70
239
407
575
744
2020
405
598
791
983
1,174
1,365
US$/bbl
20
30
40
50
60
70
Source: UBS estimates
2021
867
1,024
1,180
1,332
1,482
1,633
2022
397
550
704
847
987
1,126
2023
322
474
627
764
897
1,029
2024
271
423
575
708
834
961
Source: UBS estimates
Leverage concerns: Where is the risk?
One of investors' main concerns stemming from lower oil prices is the capacity
O&G companies have to absorb the impacts of lower cash flow generation.
Among our major O&G coverage, we think risks are lower for companies such as
PBR and EC. However, YPF has to navigate a more challenging situation due to the
closer maturity of its debt profile and the economic situation in Argentina. As a
response, we believe the company may dramatically decrease its capex for the
short-term.
Figure 14: O&G ND/EBITDA
4.0x
3.9x
2.9x
2.5x
2.0x
2.3x
1.3x
PBR
EC
YPF
2020
1.2x
CNE
2021
Source: UBS estimates
For the junior O&G companies we cover, the level of debt is in equilibrium. CNE
may face relatively less pressure on its results due to lower oil prices, and ENAT,
which is more linked with oil, is net cash. We only see a real risk for YPF's
investment case; although we believe the company can remedy the situation. Most
of the companies have released their contingency plans in order to deal with the
Covid-19 outbreak scenario, not only in operational front, but also in a financial
perspective. Below a debt profile summary of Latam O&G companies:
Figure 15: Debt profile summary
Company
Rating
S&P
Year end 2019 (US$)
Moody's Total Debt
Cash
Liquidity
Debt profile
2020
2021
2022
2023+
Petrobras
BB-
Ba2
63.3
0.6
7.4
4.5
4.0
4.7
50.1
Ecopetrol
BBB-
Baa3
11.0
-
2.1
0.5
0.9
0.5
9.1
YPF
B-
Caa3
8.8
1.2
1.4
1.6
1.4
0.7
4.9
Enauta
n.a
n.a
0.1
0.0
0.4
-
-
-
0.1
CNE
n.a
n.a
0.4
-
0.0
14.3
31.9
336.1
Source: UBS and companies (all companies in US$ bn, excluding CNE, which is US$mn)
Note: Liquidity = cash + cash equivalent/ST investments
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 7
Challenging period ahead
On its own, the coronavirus outbreak impacting 1H20 demand meaningfully made
it a difficult year to return the market to balance – we estimate global oil demand
down 11Mb/d in 1H20 and down 7Mb/d over 2020 with broadening and
deepening restrictions around the world continuing to pressure the demand
outlook.
After combining it with the surprising collapse of the OPEC+ consensus makes for
dual shock conditions unprecedented in modern history. However, at its 9 April
meeting, OPEC+ set out a 10Mbd cut, adjusted to 9.7Mbd on a lower Mexico cut,
but from an Oct-18 reference (and using assumed levels for Saudi and Russia). It
implies ~7.0Mbd vs 1Q20 – not close to offsetting 2Q20 demand decline which
we est. at ~17Mbd y/y.). From 1 Jul it will be 7.7Mbd and from 1 Jan 21 to Apr 22,
5.8Mbd. There is also potential for GCC producers to over-comply as has recently
been the case
We had no expectation of a production cut large enough to balance 2Q. The
agreement does provide meaningful mitigation, however, and likely shut-ins
and/or more storage will make up the difference (we estimate a ~May/June filling
of ‘normal’ global storage capacity). But the unusual length and specificity of the
agreement acknowledges the need to stabilise and rehabilitate the market after
this episode passes – and given uncertainty over the timing and scale of recovery,
the agreed framework looks appropriately cautious. Markets will inevitably be
skeptical on ongoing discipline and whether the figures have been correctly
pitched – but we think it’s a decent start.
Figure 16: UBS oil price forecast
Source: UBS estimates
By contrast the G20 communique from Friday is notable for its absence of
specificity – there had been some expectation of commitments from other
producers or acknowledgement of shut-ins and economic reductions that might
add a further 5Mbd. These were not forthcoming, although Energy Ministers
acknowledge the need to use all available tools to maintain market stability and a
well-functioning energy market. We believe production declines/shut-ins in the
US, Canada and Brazil (indicated by OPEC+ to amount to 3.7Mbd) will have
been taken into account in producer group thinking.
We forecast oil prices head lower through 2Q since the data and market dynamic
will be such a headwind, even if this weekend's developments prompt a shortterm increase. But restoring supply side management after the market share battle
post-March OPEC+ should then see recovery as developed economies re-open.
This unsustainable situation requires supply-side moderation although this is
unlikely to be enough to save 2Q. But moderation in total production levels in
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 8
2H20 combined with demand recovering from the pandemic effects leads to
markets to returning closer to balance. Declines in US tight oil should also help: US
production has slowed significantly from +2.2Mb/d in 2018 to ~+1.7Mb/d in
2019, and we expect a further deceleration to +0.4Mb/d in 2020E (with
meaningful sequential declines within the year) as producers cut activity to
preserve cash.
December-to-December we expect US crude production down ~900kb/d. We see a
rising call on OPEC emerging in the early 2020s as non-OPEC supply growth slows
(normalising shale and the effects of conservative conventional investment) and
demand returns closer to trend in 2021. We see oil prices settling in the $6080/bbl range long-term – but towards the lower end initially as the supply side
works through spare capacity. Click here to read the full report.
Upside price scenario
Given the market's response to the coronavirus outbreak we believe that a smaller
than expected impact on demand would be bullish for oil prices. A combination of
the two events would mean a return of the market towards normalization by as
early as 2H20 (we had previously modelled the market as being undersupplied by
~0.6Mb/d in 2H20 before the outbreak) and prompt a recovery in oil prices back to
our previous 2020 forecast of $60/bbl and towards $70/bbl over the succeeding
years as slowing non-OPEC production and recovering demand work down global
oil inventory levels. This could be setting the market up for an overtightening and
prices well above $70/bbl for a period.
Downside price scenario
A more severe pandemic that survives summer and extends over the remainder of
the year would be the main driver of our downside scenario at this point, in part
because it would suggest meaningful weakness extending into 2021. Increases in
OPEC – particularly through a recovery in Libya or Venezuela – would further
oversupply the market. It must be noted that this is an extreme scenario
considering that the current state of the market is unprecedented in itself.
This would lead the global market towards reaching total-nominal storage capacity
(historical utilization has tended to be in the 70% range or below). A similar
outcome would result if no supply side restraint can be agreed in the coming
weeks/months. Should an extreme oversupply situation persist we could see prices
persisting well below the $30 level as it descends to the operating cost of swing
supply.
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 9
Figure 17: UBSe S/D balance and implied stock change
(Mb/d)
Figure 18: Brent ($/bbl), UBSe, futures strip and options
market-implied confidence intervals
Source: UBS estimates, IEA.
Source: UBS estimates, Reuters
What comes after - demand?
Our primary concern is understanding the economic effects of the virus outbreak.
That is whether the global economy recovers quickly (as the extraordinary
measures being put in place by governments are designed to help with) or we see
a longer recession/depression. A longer effect is not our central case but remains a
plausible scenario.
Whether there are any specific changes for the oil sector is also an area for
consideration – stimulus spending directed into new greener energy systems or
changing individual consumer behavior (flying or travelling less) are all possibilities
although we distinctly remember the same arguments being put forward after
9/11 and the GFC and nothing really changed.
What we do observe is that the intense volatility in oil markets coupled with the
behavior of the major OPEC+ suppliers absenting themselves from even an attempt
in stabilizing may stimulate an increased focus in consuming countries of improved
security of supply which would inevitably lead to renewables. Indeed for the large
oil majors, now seeking to be energy majors, hurt by the same volatility, the
incentive to facilitate this build out is also greater.
What comes next – supply?
The market is implicitly in an over-supply situation even as demand recovers
through 2H20. That is why we expect some sort of supply-side arrangement to
emerge. If it doesn’t, the market price will remain ruinously low and affect both
production shut-ins in the industry.
Already supply-side investment has been cut hard – we estimate the global IOCs
are cutting 2020 against plan by ~20%; the EM producers by >10% and North
American producers by 25-45%. This is off a significantly reduced level from the
first half of the last decade and there is a good case to say that this level of
investment is below sustaining levels
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 10
Figure 19: Operating cost curve, existing production (y-axis in $/bbl, x-axis in mb/d cumulative)
Source: IHS, Wood MacKenzie, Federal Reserve Bank of Dallas, IEA, UBS estimates Note: Canada and US breakevens assume $20/bbl WCS-Brent and $5/bbl WTI-Brent,
respectively
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 11
Buy * (Price target R$21.00)
Petrobras (PN)
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS
Q: How will COVID-19 impact the company profitability?
The hefty oil price drop has led PBR's stock price to tumble 30% since the OPEC+ breakdown. This
decrease can be mainly explained by its lower top line due to the lower oil prices, along with lower
demand, which is likely to impact the company's upstream and downstream margins. Secondary
impacts, such as oil curve production, may also pressure the company's results. EV/EBITDA for 1FY
leads us to a multiple of c5x, which we view as fair. We estimate EBITDA will drop to around US$20bn
in 2020 from US$35bn, a significant decline, considering the company's debt level.
Q: Will there be any impact to the company divestments?
We believe there will be two main impacts on its divestments: delays and valuation. The first, as
already reported by the company, is well known by the market. The refinery sales were delayed by the
company due to operational issues caused by coronavirus. The valuation issue may come on the back
of higher risk perception, GDP growth revisions and lower oil prices. We believe at this point and due
to PBR's deadline to sell gas and refining assets, buyers will not be able to pay the same amount as
discussed last year (cUS$28bn), which we view as negative for the deleveraging process.
Q: Is PBR's leverage a real concern?
The company has total debt of cUS$63bn excluding leasing and pension liabilities, with US$4.7bn and
US$3.9bn in debt maturing in 2020 and 2021, respectively. We view the company's debt maturity
profile as well balanced, with no major risks in this area. However, the company's coverage ratio could
jump from 2.4x ND/EBITDA to c.4x at the end of 2020E due to the lower denominator. Thus, we
foresee two major impacts: increased risk perception and a slower deleveraging pace.
UBS VIEW
We have had a supportive outlook on Petrobras' investment case since 2016, based on: 1) strong FCF,
backed by production growth, a rational capex mindset and domestic fuel price alignment with
international parity; and 2) an aggressive divestment plan that will reduce the company's leverage and
could reduce future controller interference, driving a shift from debt to equity value. We believed this
thesis would play out until mid-2021, until the bulk of divestment was completed; however we now
believe this may take longer to happen.
EVIDENCE
Lower oil prices, the demand impact and a lower GDP growth forecast lead us to lower our forecast for
2020 and thereafter. While the company will generate less operational cash flow, demand could be
pressured by the challenging short-term environment, with UBSe GDP growth shrinking to 0.5% from
1.4%. However, we see a limited impact on PBR's returns, as pre-salt and overall production are still
supported by a low break-even price of around US$16/bbl.
WHAT'S PRICED IN?
The market is pricing in oil prices of around US$50/bbl over the long term, below our forecast,
explaining the current stock price. We also see a high level of uncertainty, which has also pressured
commodities company prices downwards.
UPSIDE / DOWNSIDE
SPECTRUM
Value driver
$31 upside
$21 base
$8 downside
Oil production
2.2mbpd
2.1mbpd
2.0mbpd
Utilization ratio
84%
78%
75%
Crack spread
+10%
base case
-10%
LT oil prices
US$70/bbl
US$60/bbl
US$50/bbl
Source: UBS estimates
COMPANY DESCRIPTION
Controlled by the Brazilian federal government, Petrobras is Brazil's national oil company, with 2017
revenue of R283bn, 9.6bn boe in proven reserves (SEC, 2018) and roughly 12bn in proved reserves.
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 12
Petrobras (PN)
UBS Research
UPSIDE / DOWNSIDE SPECTRUM
Source: UBS estimates
Risk to the current share price is skewed (1.6:1) to the upside
PBR is trading at R$16.73 (as of 14 April).
Upside (R$31): In our upside case, we project production of 2.2m bpd in 2020, long-term oil at
US$70/bbl, the crack spread 10% higher and a utilization ratio of 85%..
Base (R$21): In our base case, we project production of 2.1m bpd in 2020, long-term oil at
US$60/bbl, a crack spread of around US$10/bbl in gasoline and US$24/bbl in diesel, and a
utilization ratio of 78% for the current year.
Downside (R$8): In our downside case, we project production of 2m bpd in 2020, long-term oil
at US$50/bbl, the crack spread 10% lower and a utilization ratio of 75%.
COMPANY DESCRIPTION
Controlled by the Brazilian federal government, Petrobras is
Brazil's national oil company, with 2017 revenue of
R283bn, 9.6bn boe in proven reserves (SEC, 2018) and
roughly 12bn in proved reserves, according to ANP. The
company has a dominant presence in upstream
(2.03MMboepd, Bz oil production), refining (~99%
Brazilian total capacity), fuel supply and distribution. It also
owns most of the country's gas pipelines/LNG terminals
and several thermoelectric power plants, as well as
petrochemicals/ethanol/gas distribution assets. Its current
guidance targets an ROCE of above 11% and ND/EBITDA
below 1.5x in 2020.
Industry outlook
Reflecting the rising negative effect on demand of the
COVID-19 outbreak and the breakdown of OPEC+, we
forecast 2020 oil demand down -1.2Mbd, or -1.2% (with a
cut of ~2.9Mbd for 1H20). Historically, an annual drop in
physical demand has been highly unusual. The inability of
OPEC+ to address this demand shock and collapse in
consensus seem to have ignited a market share war. Our
long-standing analysis shows a full-cycle, incentive-based
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 13
normalised oil price of around $60-$80/bbl. However, the
impact of the projected 2020 market and likelihood that
spare capacity is utilized more fully than previously leads us
to set 2024/25E at the low end of that.
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 14
Petrobras: Our investment case to develop at much
slower pace
We have had a positive outlook on PBR's investment case due to: 1) strong FCF
backed by production growth, a rational capex mindset and domestic fuel prices
aligned with international parity; and 2) its divestment plan, which will reduce its
leverage and could lower future controller interference, driving a shift from debt to
equity value.
We previously believed this thesis was likely to play out by mid-2021, when the
bulk of its divestment is completed. However, as we have discussed, with lower oil
prices, the deleveraging process could take more time than our previous forecast,
may impact the company's risk perception among investors and will delay more
robust dividend payments.
We now believe the divestment program will take longer to conclude, as O&G
players' investment appetite is cut. Consequently, Petrobras' deleveraging could
also happen at a slower pace than we expected. The company's multiples are likely
to be pressured, with considerable downside to its financials. Despite ongoing
improvements presented in lifting costs, the new price scenario is likely to
significantly reduce E&P returns.
Although Petrobras had already presented a capex guidance US$8.4b below the
numbers observed in the 2019/23 plan, given the new scenario, the company is
likely to further reduce investments, delaying its capex to when oil prices start to
recover above the current US$30-40/bbl level.
Figure 20: Valuation sensitivity to 2020E oil prices
23
22
21
20
19
US$20/bbl
US$30/bbl
US$40/bbl
US$50/bbl
US$60/bbl
Source: UBS estimates
Dealing with Covid-19 impacts
Petrobras also informed that April's production will be around 2.07mbpd, which
includes the reductions announced due to the COVID-19 impact. The company
also highlighted that it will continue to monitor the market and, if necessary, it will
make new adjustments always ensuring safety conditions for people, operations
and processes.
The previous production levels could lead the company to face storage problems,
which could result in the need to store oil in vessels. According to PBR’s CEO, Mr.
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 15
Roberto Castello Branco, he is not against government spending, but would be in
favour of such measures in such a crisis situation, because the economy would
need it. However, Mr. Castello Branco supported that spending had to be done
rationally, allocating it efficiently, trying to achieve what is really important, where
it is necessary to inject resources
Petrobras announced new measures to mitigate the impacts of the dual shock in
oil from the COVID-19 outbreak and OPEC+ breakdown. The company has
increased the cut to oil production to 200kbpd, from the c.100kbpd announced a
week before. The decision on which fields to cut production will take into
consideration market and operational conditions, and further adjustments to
production will continue to be evaluated. We have so far seen cuts being
announced mainly in onshore and shallow water fields, which carry higher
operating costs. PBR also announced it will adjust its refineries throughput, as a
result of the impact in demand for oil products.
As part of its intention to reduce operating expenses by US$2bn, the company is
reducing c.R$700mn with 1) postponement of payments of the monthly
remuneration of employees with managerial position; 2) changes to shift work and
on-call shift to administrative work of close to 3,200 employees; and 3) reduction
to 6 from 8 in working hours of close to 21,000 employees. Transpetro, a whollyowned subsidiary, has also announced a resilience plan, postponing or optimizing
disbursements of R$507mn.
Figure 21: PBR production curve (kbpd)
3,000
2,500
2,000
1,500
1,000
500
0
Source: UBS estimates
Maintain Buy; decreasing PT to R$21 from R$34
We are updating our model to incorporate: 1) revised UBS oil production forecasts
based on our new production curve, which is slightly weaker in the short term,
with lower prices; 2) lower crack spreads in refineries due to lower oil prices and
demand compression; 3) UBS's updated macro forecast; 4) new reserves based on
the 2019 20-f and annual evaluation; and 5) lower capex due to the top-down
scenario.
Lower oil prices are leading us to decrease E&P business valuation R$5/share.
Lower demand, mainly in the short term, could lead the downstream segment to a
lower utilization ratio and lower crack spreads. We are lowering our refining crack
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 16
spread estimates to cUSD11/bbl in gasoline and cUSD23/bbl in diesel. The
utilization capacity may remain flattish in 2020 vs. 3% fuel demand growth in our
previous base case. Weaker margins and lower demand decrease our refining
business valuation R$7/share. BRL depreciation and a slower pace of divestments
also change our net debt and G&A assumptions, which lower our PT by R$2/share.
Figure 22: Old vs. new price target
40
35
30
25
20
15
10
5
0
E&P
PT
Refining
business
G&A
Net Debt
New PT
Source: UBS estimates
SOTP: New price target in a new oil price environment
We are decreasing our refining margin and utilization ratio estimates, as we believe
the current scenario may impact the downstream segment in terms of margins and
demand. We are also lowering our capex assumption due to the current oil prices
and the company's indication that it is going to review its investment plan. This
decreases our valuation of the refining business to roughly R$10/share (R$7/share). In our model, we do not consider divestments and they represent
upside potential to our base case, but currently, we see more overall downside
from our previous base case of cUSD28bn.
Figure 23: New refining business valuation
Refining NPV
2020
2021
2022
2023
2024
EBIT
1,006
3,571
5,495
7,290
7,451
2.3%
705
2,500
3,846
5,103
5,216
2.70%
CDS spread. Damodaran
9,941
10,319
10,711
11,118
11,540
6.0%
Spread (SP&500 - 10-y Tbond)
NOPAT
DD&A
Comments
US Treasury 30-year bond as of Dec 2019
WC
2,935
(2,609)
(1,385)
(406)
(1,623)
1.3
Beta PBR Reuters
CAPEX
(4,765)
(4,390)
(4,300)
(4,300)
(4,300)
34%
Tax Rate
FCF (BRL mn)
8,816
5,819
8,872
11,515
10,833
13.0%
Ke
FCF (USD mn)
1,850
1,326
2,063
2,678
2,519
65.0%
Equity %
34,252
35.0%
Debt %
1,850
1,199
1,688
1,981
24,596
6.0%
Kd
10.6%
WACC
Perpetuity (USD mn)
DCF
WACC
Growth (%)
EV (USD mn)
10.6%
3.0%
31,313
Source: UBS estimates
Weaker refining margins and higher oil derivative production lead to lower EBITDA
and, thus, lower cash flow generation. We believe that in the next five years, the
gasoline and diesel crack spread will remain flattish, likely even after the sale of
refineries in Brazil, as competition among refineries and importers may decrease
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 17
overall refining margins in Brazil. We also expect the utilization rate to face
downward pressure in 2020E due to COVID-19, to 78% from 83% in our previous
model, with weaker GDP growth and implementation of a coronavirus lockdown
in Brazil.
Figure 24: Old refining business valuation
Refining NPV
2020
2021
EBIT
5,910
9,495
2022
2023
11,360
13,596
2024
Comments
14,729
2.3%
US Treasury 10-year bond as of May 2018
NOPAT
4,137
6,646
7,952
9,517
10,310
2.70%
CDS spread (Brazil – USA). Source: Damodaran
DD&A
9,839
10,213
10,601
11,003
11,422
5.0%
Spread between SP&500 and 10-y Tbond
810
(2,261)
(1,411)
(1,253)
(739)
1.3
Beta PBR Bloomberg
CAPEX
(4,000)
(8,000)
(4,000)
(4,000)
(4,000)
34%
Tax Rate
FCF (BRL mn)
10,786
6,598
13,141
15,268
16,993
11.7%
FCF (USD mn)
2,696
1,649
3,285
3,817
WC
Perpetuity (USD mn)
DCF
2,696
WACC
9.7%
g
3.0%
EV (USD mn)
1,503
2,730
2,891
4,248
65.0%
65,260
35.0%
47,988
6.0%
Target capital structure structure
9.7%
WACC
57,808
Source: UBS estimates
To capture future pre-salt costs, we are changing our model; we now have a more
sophisticated analysis, with three developed field models (concession, PSAs and
ToR) and one undeveloped field model. The development areas are separated by
regime, as they have different costs and royalty structures and, therefore, different
profitability. We believe Petrobras receives the highest returns from ToR areas,
followed by concessions and PSAs.
We have also incorporate the new reserve estimate, which impacts E&P valuation
positively, although the oil price drop more than offsets that effect, impacting
upstream valuation by US$5/bbl and decreasing its value.
Figure 25: New E&P business valuation
E&P SOTP
Proven developed (SEC)
Data
Value
Unit
Multiple
Breakdown (%)
US$m
Comment
Reserves
6,037
mm boe
14.2
100%
85,725
From 20F
14.5
37%
32,548
Transfer of Right
PSA
Consortium
9.6
5%
2,679
14.3
58%
50,498
Proven undeveloped (SEC)
Reserves
3,553
mm boe
3.9
14,018
From 20F
Proven SPE delta (SEC P1-SPE P1)
Reserves
1,645
mm boe
2.3
3,708
From company press release
Unit
$/boe
Dev
Lift
YTDev
0
Reserve base
Value
SEC res erves (P1)
9,590
Developed
6,037
mm boe
14.2
6.5
17.3
Undeveloped
3,553
mm boe
5.3
7.5
17.3
3
11,235
mm boe
3.0
7.5
17.3
3
SPE reserves (P1)
Comment
mm boe
Source: UBS estimates
Figure 26: Old E&P business valuation
E&P SOTP
Proven developed (SEC)
Data
Value
Unit
Multiple
Breakdown (%)
US$m
Comment
Reserves
5,218
mm boe
19.9
100%
103,590
From 20F
19.9
37%
38,598
Transfer of Right
PSA
12.4
5%
2,972
Consortium
20.4
58%
62,019
Proven undeveloped (SEC)
Reserves
4,388
mm boe
5.7
24,958
From 20F
Proven SPE delta (SEC P1-SPE P1)
Reserves
2,351
mm boe
2.3
5,299
From company press release
Unit
$/boe
Dev
Lift
YTDev
Reserve base
Value
SEC res erves (P1)
9,606
mm boe
Developed
5,218
mm boe
19.9
6.5
17.2
0
Undeveloped
4,388
mm boe
7.6
7.5
17.2
3
11,957
mm boe
3.0
7.5
17.2
3
SPE reserves (P1)
Comment
Source: UBS estimates
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 18
Figure 27: Sum-of-the-parts valuation
SUM OF THE PARTS
Data
Value
Unit
Multiple
Unit
USDm US$/ADR BRL/share
Comment
Total assets
E&P (2019A)
Res erves
11,235
mm boe
USD/boe
103,451
15.9
38
Proven developed (SEC)
Reserves
6,037
mm boe
14.2
USD/boe
85,725
13.1
31
Operating assets
Proven undeveloped (SEC)
Reserves
3,553
mm boe
3.9
USD/boe
14,018
2.1
5
Developed in 4 years
Proven SPE delta (SEC P1-SPE P1)
Reserves
1,645
mm boe
2.3
USD/boe
3,708
0.6
1
DCF
31,313
USDm
31,313
4.8
11
Refining
BR+Liquigas
16,282
R$mn
PBR stake
3,417
0.5
1
G&P
EBITDA '18
1,386
USDm
6.0x
EV/EBITDA
8,314
1.3
3
Chemicals
Mkt Value
10,205
R$mn
100.0%
PBR stake
2,142
0.3
1
(1,756)
USDm
6.0x
EV/EBITDA
(10,538)
(1.6)
(4)
(6,302)
(1.0)
(2)
(-) Net debt
(74,813)
(11.5)
(27)
NAV
56,985
9.5
23
PETR3 (ON)
8.5
21
PETR4 (PN)
Distribution
(-) Corporate overhead
LTM
(-) Off-Balance Contingencies
(42,015)
15.0%
PBR stake in Braskem
Source: UBS estimates
Financials: Revenue, EBITDA and bottom line
We expect PBR's financial results to deteriorate significantly, especially in the shortterm, mainly due to the current oil prices, along with pressure from lower GDP
growth and demand for fuel due to the COVID-19 impact. Production is also likely
to drop due to the potential impact of coronavirus on E&P operations, given
logistical restrictions. Net income could decrease due to a lower top line and
margins, in line with an EPS decrease. We still think results could increase from
2019 to 2020, mainly on the top line, mostly due to a production increase.
Figure 28: New vs. old financials
US$ (Old)
Net Revenues
EBITDA
Net Income
EPS
2020
85,687
35,569
8,721
1.34
2021
99,979
41,568
12,491
1.92
2022
112,530
46,814
15,074
2.31
2023
123,192
51,245
18,288
2.80
2024
130,193
54,159
20,638
3.16
US$ (New)
Net Revenues
EBITDA
Net Income
EPS
2020
44,228
17,057
544
0.08
2021
65,662
26,859
4,904
0.75
2022
85,481
35,089
9,868
1.51
2023
95,611
39,283
12,934
1.98
2024
109,301
44,947
16,432
2.52
Change (%)
Net Revenues
EBITDA
Net Income
EPS
2020
-48.4%
-52.0%
-93.8%
-93.8%
2021
-34.3%
-35.4%
-60.7%
-60.7%
2022
-24.0%
-25.0%
-34.5%
-34.5%
2023
-22.4%
-23.3%
-29.3%
-29.3%
2024
-16.0%
-17.0%
-20.4%
-20.4%
Source: UBS estimates
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 19
Petrobras (PN) (PETR4.SA)
Income statement (R$m)
Revenues
EBITDA (UBS)
DD&A and exploration
EBIT (UBS)
Assoc and other inc (UBS, pre-tax)
Net interest
Other pre-tax items
Profit before tax (UBS)
Tax (UBS)
Profit after tax (UBS)
Minorities
Other post-tax items
Net earnings (UBS)
Exceptionals/Extraordinaries
Net earnings (reported)
Tax rate (%)
Per share (R$)
EPS (reported, diluted)
EPS (UBS, basic)
EPS (UBS, diluted)
Net DPS (R$)
Cash EPS (UBS, diluted)
Book value per share
Average shares (diluted)
Balance sheet (R$m)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Common s/h equity
Minority interests
Total liabilities & equity
Total capital employed
Net (debt) cash
Cash flow (R$m)
Net earnings (reported) pre MI
DD&A and exploration expensed
Net change in working capital
Other (operating)
Operating cash flow
Capital expenditure
Equity free cash flow
Net (acquisitions) & disposals
Dividends paid
Share issues / (buybacks)
Net other cash flows
Cash flow (inc)/dec in net debt
FX / non cash items
Dec / (inc) in net debt
12/16
282,589.0
65,564.0
(48,453.0)
17,111.0
0.0
(19,065.0)
(8,749.0)
(10,703.0)
(2,342.0)
(13,045.0)
(1,779.0)
0.0
(14,824.0)
0.0
(14,824.0)
-0.2
12/17
283,695.0
78,102.0
(42,478.0)
35,624.0
0.0
(15,407.0)
(14,043.0)
6,174.0
(5,797.0)
377.0
(823.0)
0.0
(446.0)
0.0
(446.0)
0.9
12/18
349,836.0
106,603.0
(43,646.0)
62,957.0
0.0
(14,225.0)
(4,956.0)
43,776.0
(17,078.0)
26,698.0
(919.0)
0.0
25,779.0
0.0
25,779.0
0.4
12/19E
302,245.0
139,656.0
(58,502.0)
81,154.0
0.0
(11,598.0)
(22,314.0)
47,242.0
(16,400.0)
30,842.0
(833.0)
10,128.0
40,137.0
0.0
40,137.0
0.3
12/16
(1.1)
(1.1)
(1.1)
0.0
3.9
19.2
13,044.0
12/17
(.0)
(.0)
(.0)
0.0
4.3
20.2
13,044.0
12/18
2.0
2.0
2.0
1.1
4.2
21.3
13,044.0
12/19E
3.1
3.1
3.1
1.2
9.2
22.7
13,044.0
% ch
-13.6
31.0
-34.0
28.9
18.5
-350.2
7.9
4.0
15.5
9.4
-
55.7
-
55.7
-11.0
% ch
55.7
55.7
55.7
8.9
121.2
6.6
0.0
% ch
12/16
12/17
12/18
12/19E
71,664.0
80,731.0
58,052.0
33,294.0
43,165.0
44,527.0
78,367.0 127,473.0
114,829.0 125,258.0 136,419.0 160,767.0
571,876.0 584,357.0 609,829.0 641,949.0
0.0
0.0
0.0
0.0
118,240.0 121,900.0 114,225.0 123,295.0
804,945.0 831,515.0 860,473.0 926,011.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
458,452.0 433,695.0 415,025.0 457,951.0
93,750.0 128,211.0 161,905.0 168,923.0
552,202.0 561,906.0 576,930.0 626,874.0
250,230.0 263,985.0 277,225.0 295,541.0
2,513.0
5,624.0
6,318.0
3,596.0
804,945.0 831,515.0 860,473.0 926,011.0
639,531.0 622,573.0 640,516.0 723,794.0
(386,788.0) (352,964.0) (356,973.0) (424,657.0)
12/16
(13,045.0)
54,509.0
2,419.0
6,449.0
50,332.0
(48,137.0)
2,195.0
2,402.0
(239.0)
0.0
60,428.0
64,786.0
0.0
64,786.0
12/17
377.0
45,041.0
(1,066.0)
11,613.0
55,965.0
(42,403.0)
13,562.0
9,907.0
(538.0)
0.0
538.0
23,469.0
0.0
23,469.0
12/18
12/19E
26,698.0
40,970.0
45,550.0
61,699.0
(28,401.0)
17,909.0
10,413.0
(545.0)
54,260.0 120,033.0
(41,246.0) (34,010.0)
13,014.0
86,023.0
20,218.0
50,370.4
(3,046.0)
(8,038.0)
0.0
0.0
7,837.0 (235,445.7)
38,023.0 (107,090.3)
0.0
(6,928.0)
38,023.0 (114,018.3)
-42.6
62.7
17.8
5.3
7.9
7.6
-
10.3
4.3
8.7
6.6
-43.1
7.6
13.0
-19.0
% ch
55.7
35.45
-
121.2
17.5
NM
149.1
-163.9
-
-
-
12/20E
210,728.5
81,271.5
(59,928.1)
21,343.4
0.0
(11,589.2)
(9,285.9)
468.3
(159.2)
309.1
2,284.3
0.0
2,593.4
0.0
2,593.4
0.3
% ch
-30.3
-41.8
-2.4
-73.7
0.1
58.4
-99.0
99.0
-99.0
-100.0
-93.5
-
-93.5
-2.1
12/20E
0.2
0.2
0.2
0.2
5.3
20.6
13,044.0
% ch
12/20E
50,731.4
112,337.6
163,068.9
621,882.2
0.0
123,295.0
908,246.2
0.0
0.0
0.0
483,568.9
154,846.5
638,415.4
268,519.1
1,311.7
908,246.2
702,668.3
(432,837.5)
% ch
12/20E
309.1
62,948.1
7,336.9
(1,995.1)
68,599.0
(42,881.3)
25,717.7
0.0
(8,280.3)
0.0
(17,437.4)
0.0
0.0
0.0
% ch
-93.5
-93.5
-93.5
-85.4
-42.8
-9.1
0.0
52.4
-11.9
1.4
-3.1
0.0
-1.9
-
5.6
-8.3
1.8
-9.1
-63.5
-1.9
-2.9
-1.9
-93.5
2.02
-59.0
-266.1
-42.8
-26.1
-70.1
-3.0
92.6
-
-
12/21E
288,257.8
117,911.1
(58,514.2)
59,397.0
0.0
(14,199.8)
(12,257.7)
32,939.5
(11,199.4)
21,740.1
(213.5)
(.0)
21,526.6
0.0
21,526.6
0.3
12/22E
367,567.3
150,883.3
(62,699.0)
88,184.4
0.0
(14,621.5)
(7,857.0)
65,705.8
(22,340.0)
43,365.8
(933.6)
(.0)
42,432.2
0.0
42,432.2
0.3
12/23E
411,127.5
168,917.8
(66,746.6)
102,171.3
0.0
(11,035.6)
(4,830.0)
86,305.6
(29,343.9)
56,961.7
(1,343.6)
(.0)
55,618.1
0.0
55,618.1
0.3
12/21E
1.7
1.7
1.7
0.7
5.9
22.4
13,044.0
12/22E
3.3
3.3
3.3
0.8
8.1
25.0
13,044.0
12/23E
4.3
4.3
4.3
1.9
9.7
27.4
13,044.0
12/21E
12/22E
34,980.2
36,364.7
124,616.4 136,748.5
159,596.6 173,113.2
608,500.9 606,807.0
0.0
0.0
123,295.0 123,295.0
891,392.5 903,215.2
0.0
0.0
0.0
0.0
0.0
0.0
436,541.4 407,511.9
160,840.6 167,422.3
597,382.0 574,934.2
292,485.3 325,822.2
1,525.2
2,458.8
891,392.5 903,215.2
695,571.7 699,428.2
(401,561.2) (371,147.2)
12/23E
24,307.5
142,349.7
166,657.2
622,304.7
0.0
123,295.0
912,256.9
0.0
0.0
0.0
369,986.7
181,298.5
551,285.2
357,169.3
3,802.5
912,256.9
706,650.9
(345,679.2)
12/21E
21,740.1
61,671.3
(6,522.9)
83.7
76,972.2
(48,290.0)
28,682.2
0.0
(2,002.3)
0.0
(44,110.8)
(17,431.0)
0.0
(17,431.0)
12/22E
43,365.8
66,193.9
(3,461.6)
(.0)
106,098.2
(64,500.0)
41,598.2
0.0
(5,577.7)
0.0
(55,656.5)
(19,636.0)
0.0
(19,636.0)
12/23E
56,961.7
70,502.3
(1,013.9)
0.0
126,450.1
(86,000.0)
40,450.1
0.0
(9,095.3)
0.0
(64,766.8)
(33,412.0)
0.0
(33,412.0)
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 20
Petrobras (PN) (PETR4.SA)
Operational data
Production (000 boe/d)
12/16
2,764.3
12/17
2,744.3
12/18
2,607.3
12/19E
2,768.3
12/20E
2,525.8
12/21E
2,636.8
12/22E
2,909.9
12/23E
3,120.8
12/16
NM
NM
2.8
1.4
0.0
0.6
8.3
13.7
NM
12/17
NM
NM
3.4
6.9
0.0
0.7
7.0
12.3
15.4
12/18
10.6
10.6
5.1
4.5
5.3
1.0
6.1
9.1
10.3
12/19E
5.4
5.4
1.8
38.8
7.3
0.7
4.6
6.3
8.0
12/20E
84.1
84.1
3.2
11.6
1.1
0.8
8.1
10.0
NM
12/21E
10.1
10.1
2.8
12.9
4.0
0.7
5.3
7.5
10.5
12/22E
5.1
5.1
2.1
18.8
4.9
0.7
3.9
5.5
6.7
12/23E
3.9
3.9
1.7
18.3
11.1
0.6
3.4
4.5
5.6
Debt adjusted cash flow (UBS)
Net earnings (reported) pre MI
DD&A and exploration expensed
Other non-cash items: Group
Other non-cash items: Associates
Post tax interest
Other
DACF (UBS)
12/16
(13,045.0)
54,509.0
0.0
0.0
0.0
(1,779.0)
39,685.0
12/17
377.0
45,041.0
0.0
0.0
0.0
(823.0)
44,595.0
12/18
26,698.0
45,550.0
0.0
0.0
0.0
(919.0)
71,329.0
12/19E
40,970.0
61,699.0
0.0
0.0
0.0
(833.0)
101,836.0
12/20E
309.1
62,948.1
0.0
0.0
0.0
2,284.3
65,541.4
12/21E
21,740.1
61,671.3
0.0
0.0
0.0
(213.5)
83,197.9
12/22E
43,365.8
66,193.9
0.0
0.0
0.0
(933.6)
108,626.1
12/23E
56,961.7
70,502.3
0.0
0.0
0.0
(1,343.6)
126,120.4
Enterprise value (R$m)
Market cap.
Net debt (cash)
Buy out of minorities
Pension provisions/other
Total enterprise value
Non core assets
Core enterprise value
12/16
156,070.5
386,788.0
0.0
0.0
542,858.5
0.0
542,858.5
12/17
195,867.0
352,964.0
0.0
0.0
548,831.0
0.0
548,831.0
12/18
291,923.1
356,973.0
0.0
0.0
648,896.1
0.0
648,896.1
12/19E
221,583.4
424,657.0
0.0
0.0
646,240.4
0.0
646,240.4
12/20E
221,583.4
432,837.5
0.0
0.0
654,420.9
0.0
654,420.9
12/21E
221,583.4
401,561.2
0.0
0.0
623,144.6
0.0
623,144.6
12/22E
221,583.4
371,147.2
0.0
0.0
592,730.6
0.0
592,730.6
12/23E
221,583.4
345,679.2
0.0
0.0
567,262.6
0.0
567,262.6
Growth (%)
Upstream volumes
EBITDA (UBS)
EBIT (UBS)
EPS (UBS, diluted)
Net DPS
12/16
0.3
150.4
57.4
-
12/17
(0.7)
19.1
108.2
97.0
-
12/18
(5.0)
36.5
76.7
-
12/19E
6.2
31.0
28.9
55.7
8.9
12/20E
(8.8)
(41.8)
(73.7)
(93.5)
(85.4)
12/21E
4.4
45.1
178.3
NM
NM
12/22E
10.4
28.0
48.5
97.1
21.4
12/23E
7.2
12.0
15.9
31.1
128.8
Profitability (%)
ROACE (UBS)
ROE (UBS)
12/16
2.4
-0.1
12/17
4.8
0.0
12/18
8.2
0.1
12/19E
10.0
0.1
12/20E
2.3
0.0
12/21E
6.7
0.1
12/22E
9.8
0.1
12/23E
11.2
0.2
Capital structure & Coverage (x)
Net debt / EBITDA
Net debt / total equity %
Net debt / (net debt + total equity) %
Net debt/EV %
Capex / depreciation %
CAPEX / operating cashflow %
EBIT / net interest
Dividend cover (UBS)
Div. payout ratio (UBS) %
12/16
5.9
1.3
0.6
0.7
99.3
95.6
0.9
0.0
12/17
4.5
1.1
0.5
0.6
99.8
75.8
2.3
0.0
12/18
3.3
1.0
0.5
0.6
94.5
76.0
4.4
1.8
56.8
12/19E
3.0
0.7
0.4
0.7
58.1
28.3
7.0
2.5
39.7
12/20E
5.3
0.9
0.5
0.7
71.6
62.5
1.8
1.1
90.1
12/21E
3.4
0.7
0.4
0.6
82.5
62.7
4.2
2.5
40.6
12/22E
2.5
0.6
0.4
0.6
102.9
60.8
6.0
4.0
25.0
12/23E
2.0
0.5
0.3
0.6
128.8
68.0
9.3
2.3
43.6
12/16
6,761.0
35,205.0
(24,855.0)
17,111.0
12/17
33,546.0
29,779.0
(27,701.0)
35,624.0
12/18
66,484.0
16,027.0
(19,554.0)
62,957.0
12/19E
75,035.0
31,205.0
(25,086.0)
81,154.0
12/20E
17,508.5
5,006.5
(1,171.6)
21,343.4
12/21E
55,199.5
7,723.3
(3,525.8)
59,397.0
12/22E
81,781.7
9,804.5
(3,401.9)
88,184.4
12/23E
93,233.6
11,763.4
(2,825.7)
102,171.3
Valuation (x)
P/E (reported, diluted)
P/E (UBS, diluted)
P/CEPS (diluted)
Equity FCF (UBS) yield %
Net dividend yield %
P/BV
EV/EBITDA
EV/DACF
EV/EBIT
EBIT (UBS) by division (R$m)
Upstream
Downstream
Other
Total
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 21
Buy * (Price target C$5.00)
Canacol Energy Ltd
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS
Q: Is there any impact on the company's results from COVID-19?
Among our LatAm O&G companies, we believe CNE is the most defensive due to its take-or-pay
contracts, which hedge close to 80% of gas sales. Additionally, we expect the company to increase
sales to 205mcfpd in 2020E, a hike of 44% YoY that could support a higher top line. CNE stated it is
taking appropriate measures to ensure that operations continue to run, while maintaining only
essential personnel in its offices. For the 20% of natural gas that is sold in the spot market, the
company has seen a 2-3% reduction in prices since the outbreak began.
Q: When are the new projects expected to come online?
Canacol expects to award an engineering, procurement and construction (EPC) contract for the
Medellin pipeline in 2Q20, with construction expected to begin shortly after that. The pipeline,
expected to come online in 2024, will provide additional capacity of 100mcfpd. The company stated
that the 200MW El Tesorito power station will be completed by the end of 2021, and is expected to
consume 40mcfpd. The company is also evaluating another power plant, which is similarly close to its
production sites as El Tesorito.
UBS VIEW
We believe Canacol is very well positioned in the E&P sector and has an attractive portfolio. Its gas
production contracts have a low correlation with Brent, and it has announced important discoveries in
the Esperanza and VIM-5 gas blocks. The new projects added to its supportive top line may help the
company deliver healthier results even during challenging oil price moments. We maintain our Buy
rating but are decreasing our PT to CAD$5/share from CAD$7/share due to lower forecast production
and net-backs and higher capex.
EVIDENCE
The company delivered in the 2H19 the Promigas pipeline, which supported production outflow and
gas sales. CNE sold 180mcfpd in 4Q19 and more than 200mcfpd in early 2020, which may support a
strong top line. However, higher royalty rates from VIM-5 production could offset part of these gains.
WHAT'S PRICED IN?
We think the market is underpricing the stock due to the higher risk perception of small caps currently.
Additionally, we think the current price reflects lower net-backs, as we see lower risk regarding sales
volume, as almost of 80% of volume is sold under take-or-pay contracts.
UPSIDE / DOWNSIDE
SPECTRUM
Value drivers
Gas sales (mcfd)
SG&A
Net-backs (USD/mcf)
$7 upside
$5 base
$2.5 downside
215
205
190
8%
9%
10%
3.97
3.70
3.55
Source: UBS estimates
COMPANY DESCRIPTION
Founded in 1970, Canacol Energy is a Canadian company engaged in the exploration and production
of oil and gas focused onshore in Colombia and Ecuador. In Colombia, Canacol is a E&P company.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 22
Canacol Energy Ltd
UBS Research
UPSIDE / DOWNSIDE SPECTRUM
Source: UBS estimates
Risk to the current share price is heavily skewed (2.7:1) to the upside
CNE is trading at CAD$3.72 (as of 14 April).
Upside (CAD$7): In our upside case, we see the company selling 215Mcfd in 2020E, net-backs
of USD3.97/mcf and SG&A close to 8% of revenue.
Base (CAD$5): In our base case, we see the company selling 205Mcfd in 2020E, net-backs of
US$3.7/Mcf and SG&A close to 9% of total revenue.
Downside (CAD$2.5): In our downside case, we see the company selling 190Mcfd in 2020E,
net-backs of US$3.55/Mcf and SG&A close to 10% of total revenue.
COMPANY DESCRIPTION
Founded in 1970, Canacol Energy is a Canadian company
engaged in the exploration and production of oil and gas
focused onshore in Colombia and Ecuador. In Colombia,
Canacol is a leading exploration and production company.
Gas sales per contract type (%)
20%
Industry outlook
Reflecting the rising negative effect on demand of the
COVID-19 outbreak and the breakdown of OPEC+, we
forecast 2020 oil demand down -1.2Mbd, or -1.2% (with a
cut of ~2.9Mbd for 1H20). The inability of OPEC+ to
address this demand shock and collapse in consensus seem
to have ignited a market share war, a development
branded as "irresponsible" by the IEA. Our long-standing
analysis shows a full-cycle, incentive-based normalised oil
price of around $60-$80/bbl. We maintain that view.
However, the impact of the projected 2020 market and
likelihood that spare capacity is utilised more fully than
previously leads us to set 24/25E at the low end of that
rather than the mid.
LatAm Oil & Gas 16 April 2020
Take or pay
Spot
80%
Source: Canacol
fernando.siqueira@
infinityasset.com.br
 23
Canacol: more defensive in middle of storm
Canacol's strategy to move production towards natural gas has left the company
in a more defensive position in moments of oil price collapses. Currently, close to
80% of CNE's gas sales are "hedged" by take-or-pay contracts. While Brent and
LatAm integrated companies dropped more than 60%, CNE fell "only" 40%.
Despite the lower oil prices, we maintain our Buy rating, as we expect: 1) a
significant sales volume increase due to the completion of the Promigas pipeline;
2) the drilling of 12 wells as a result of its exploration program; 3) the Medellin
project, which may add 100MMcfpd by 2023; and 4) a recurring quarterly
dividend payment.
Plans for the future: Additional capacity welcome
We believe plans to expand capacity to close to 300mcfpd with the construction of
the Medellin pipeline are not likely to be impacted by current oil prices, as the
country is short on gas, has a low reserve lifetime and there are bottlenecks in
logistics to import LNG from other countries. However, 4Q19 turned on the yellow
light, as transportation and royalties expenses printed significant increases,
impacting gas net sale net-backs. Additionally, lower oil prices may impact
negotiations with new consumers, which may not be able to pay the same value
paid in old contracts, decreasing the company's top line.
Model update: Decreasing PT to C$5.0 from C$7.0; reiterate
Buy
We are updating our model for CNE, with an oil price curve update, new guidance
estimate and 4Q19 results. Our WACC decreases 50bps due to the lower market
premium of 6%, in line with our coverage.
Figure 29: Old WACC
Figure 30: New WACC
US$
Risk Free
Country Risk premium
Mkt Premium
Beta
Comments
2.3%
US Treasury 30y bond Nov-19
2.64%
COL x USA | Damodaran Country Risk Premium
6.5%
equity risk (5.5%) + (1% liquidity premium)
1.1
CNE.TO Reuters Beta
US$
Comments
Risk Free
Country Risk premium
2.3%
2.64% COL x USA | Damodaran Country Risk Premium
Mkt Premium
Beta
6.0%
equity risk (6%)
1.1
CNE.TO Reuters Beta
Ke (US$)
12.4%
Ke (US$)
11.8%
Equity/Total Capital
60.0%
Equity/Total Capital
60.0%
Debt/Total Capital
40.0%
Debt/Total Capital
40.0%
Tax Rate
30.0%
Tax Rate
30.0%
Kd (US$)
6.2%
Kd (US$)
6.2%
WACC (US$)
9.9%
WACC (US$)
9.5%
Source: UBS estimates
US Treasury 30y bond Nov-19
Source: UBS estimates
After updating our model, we are decreasing our 2020-23E EBITDA around 10%
due to lower production estimates and net-backs, with earnings and EPS dropping
close to 15% in upcoming years. The lower EPS can be explained by a weak
bottom line, which is impacting our forecast. We are also updating our capex
forecasts based on our new capex model. We believe if CNE does not increase
production, capex would remain slightly above US$100m. In our view, this is
sufficient to replace 100% of reserves and maintain production at the current
level.
LatAm Oil & Gas 16 April 2020
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 24
Figure 31: Changes to estimates (old vs. new)
US$ (Old)
Net Revenues
EBITDA
Net Income
EPS
2020
370
273
99
0.55
2021
377
277
106
0.59
2022
384
283
114
0.64
2023
392
288
119
0.67
2024
n.a.
n.a.
n.a.
n.a.
US$ (New)
Net Revenues
EBITDA
Net Income
EPS
2020
341
244
82
0.46
2021
348
249
89
0.50
2022
356
255
96
0.54
2023
363
260
101
0.57
2024
372
266
108
0.60
Change (%)
Net Revenues
EBITDA
Net Income
EPS
2020
-7.8%
-10.5%
-16.9%
-16.9%
2021
-7.5%
-10.1%
-15.6%
-15.6%
2022
-7.4%
-9.9%
-15.8%
-15.8%
2023
-7.3%
-9.8%
-14.8%
-14.8%
2024
n.a.
n.a.
n.a.
n.a.
Source: UBS estimates
Figure 32: Old equity bridge
g
Figure 33: New equity bridge
0.0%
EV
1,344
g
0.0%
EV
1,021
Net Debt
351
Net Debt
NAV
993
NAV
670
Target Price
7.0
Target Price
5.0
Current Price
4.80
Current Price
3.12
Upside
46%
Upside
60%
Source: UBS estimates
351
Source: UBS estimates
We are lowering our price target to C$5/share from C$7/share due to our new
production curve (-C$1/share), net-backs (-C$0.5/share) and revised capex (C$0.5/share).
Figure 34: PT decrease breakdown
7.0
1.0
0.5
0.5
5.0
PT
Production
CAPEX
Net Back
New PT
Source: UBS estimates
LatAm Oil & Gas 16 April 2020
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 25
Figure 35: Old DCF
Figure 36: New DCF
DCF
2020
2021
2022
2023
Perpetuity
DCF
2020
2021
2022
2023
2024
Perpetuity
EBIT (ex- exploration exp)
191
196
201
207
207
EBIT + exploration
166
171
177
182
188
188
NOPAT
133
137
141
145
145
NOPAT
116
120
124
127
132
132
DD&A
82
82
82
82
82
DD&A
78
78
78
78
78
78
WC
(9)
(7)
(2)
(2)
(2)
WC
6
(5)
(0)
(0)
(0)
(0)
CAPEX
(87)
(89)
(92)
(95)
(95)
CAPEX
(112)
(114)
(116)
(117)
(119)
(119)
FCF (USD mn)
119
123
129
130
130
FCF (USD mn)
88
79
86
88
90
Perpetuity (USD mn)
1,317
DCF
116
109
104
96
970
Source: UBS estimates
Perpetuity (USD mn)
90
949
DCF
88
72
72
67
63
659
Source: UBS estimates
Is CNE a commodity producer or utility? We think it is the latter
One important question is how to view CNE's stock. The market has traditionally
viewed the company as a commodity player - a simple supplier of gas and oil. After
the sale of its conventional oil assets to Arrow Exploration, the company has
almost completed its strategic shift to focusing only on gas production.
Additionally, CNE has substantially reduced its exposure to oil prices, which we
view as a positive strategy. As per the company, close to 80% of its gas sales are
fixed with take-or-pay contracts, meaning its top line is very stable. Barring supply
problems (eg, an operational issue) we do not expect any major revenue
fluctuations.
Figure 37: Gas realization price vs. Brent price
Figure 38: Variation in gas realization and oil prices
6.00
80.0
75.0
5.50
20%
15%
70.0
Realization price (US$/Mcfpd)
Source: Company and UBS
-10%
2Q19
40.0
1Q19
-5%
2Q19
1Q19
4Q18
3Q18
2Q18
1Q18
4Q17
3Q17
2Q17
1Q17
3.00
45.0
4Q18
3.50
0%
3Q18
50.0
2Q18
55.0
4.00
5%
1Q18
60.0
4Q17
4.50
10%
3Q17
65.0
2Q17
5.00
-15%
Brent (US$/bbl)
Realization price (US$/Mcfpd)
Brent (US$/bbl)
Source: Company and UBS
The chart above shows that gas realization prices are much less volatile than Brent
prices. As volatility is an important factor in risk perception, we think it is unfair to
compare CNE's multiple with those of O&G companies.
Operational and SG&A expense dilution offers upside potential
Close to 90% of the company's operational expenses are fixed. Increased
production may help the company leverage its operational capacity and achieve
lower costs per Mcfpd. SG&A costs are mostly fixed, so increased production will
dilute the impact on costs per Mcfpd. Recently, the company's opex has dropped
(in percentage), mostly for two reasons: 1) launch of the Jobo 2 facility; and 2)
production growth. Given the startup of the Promigas pipeline, the second factor
will play an important role in decreasing the company's costs in the short term.
LatAm Oil & Gas 16 April 2020
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 26
Production capacity higher than logistical capacity; no supply-demand
constraints
According to the UPME, a government mining and energy body, gas demand in
Colombia will grow c3% pa in coming years. It expects thermal energy to account
for the majority of this growth.
Figure 39: Gas demand in Colombia (Mcf/d)
1,100
1,000
900
800
700
600
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Source: UPME and UBS estimates
In 2018, the UPME estimates natural gas demand reached 1.15Bcf/d, c35% of
which went to thermal players, while the remainder was divided among industrial
customers (21%), the oil sector (19%), the residential segment (13%) and others.
On the supply side, the case is also supportive. The main fields in Colombia are
Chuchupa and Ballena, operated by Chevron (W.I.: 43%) with the participation of
Ecopetrol (WI: 57%). However, since 2014, production at these fields has
decreased 15-20% per year, with a cumulative decline of 300mcfpd, 50% higher
than CNE's total sales of 215mcfpd as of the end of 2019.
Figure 40: Supply of gas in Colombia (Gbtu)
1,400
1,200
1,000
800
600
400
200
0
2014
2015
2015
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Chuchupa & Ballena (La Guajira)
Cupiagua (Casanare)
Cusiana (Casanare)
Nelson (Cordoba)
Gibraltar (Norte de Santander)
La Creciente (Sucre)
Clarinete (Cordoba)
Other
2027
Source: Promigas and UBS estimates
LatAm Oil & Gas 16 April 2020
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 27
Buy * (Price target R$13.00)
Enauta
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS
Q: What is the current oil price in Atlanta's definitive system project?
As we have previously discussed, we believe the definitive system has significant upside potential.
However, given the lower oil prices, this upside could be very limited. Due to a lack of clarity on some
important project variables, we are adopting a more conservative approach: we are not including the
definitive system in our base case but we see significant upside potential of around R$4/share, with
NPV of US$9.6/bbl, taking into account the recent news regarding the definitive system.
UBS VIEW
Before the recent impact of COVID-19 and oil price collapse, most of the stock's upside potential was
priced in, including the reserve review and a lower Brent discount. However, the O&G industry has
turned upside down. As one of Enauta's most important decisions, Atlanta's definitive system has
become much more challenging in the current scenario and unfeasible at current oil prices, which may
lead the company to postpone the decision or re-think the project. However, we believe the O&G gas
project is aimed for the long term; it remains cash flow-positive in our base case, even with oil prices
around USD40/bbl. Thus, we are upgrading our rating from Neutral to Buy, as we believe most of the
downside risks are priced in.
EVIDENCE
The company has stated that it will continue its procurement process to contract the definitive system;
however, due to the current oil prices, the project may be delayed. Even with our new oil curve, we see
upside potential for ENAT's investment case, even without the definitive system.
WHAT'S PRICED IN?
We believe the market has priced in oil around of US$50/bbl over the long term, below the UBSe
curve. Additional upside, such as farm-outs, is also not taken into consideration.
UPSIDE / DOWNSIDE
SPECTRUM
Value drivers
LT oil prices
Definitive system
Manati abandonment cost
R$17.5 upside
R$13 base
R$9 downside
US$70/bbl
US$60/bbl
US$50/bbl
Yes
No
No
25.5%
26.5%
27.5%
Source: UBS estimates
COMPANY DESCRIPTION
Enauta (ENAT) is a Brazilian company engaged in exploration and production of oil and gas. Founded
in 1980, Enauta's main assets are the Manati and Atlanta Fields.
LatAm Oil & Gas 16 April 2020
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 28
Enauta
UBS Research
UPSIDE / DOWNSIDE SPECTRUM
Source: UBS estimates
Risk to the current share price is heavily skewed (7:1) to the upside
ENAT is trading at R$10.09 (as of 14 April).
Upside (US$:17.5): In our upside scenario, we foresee oil prices at US$70/bbl over the long term
and an oil discount of US$10/bbl, taking into account the definitive system of Atlanta and
abandonment capex of US$60m at Manati (2020E EBITDA: 1.1bn; 2020E EV: 2.3bn).
Base (R$13): In our base case, we foresee oil prices at US$60/bbl over the long term, an oil
discount of US$10/bbl and abandonment capex of US$60m at Manati.
Downside (R$9): In our downside scenario, we foresee oil prices at US$50/bbl over the long
term, an oil discount of US$20/bbl and abandonment capex of US$90m at Manati (2020E
EBITDA: 559m; 2020E EV: 1.81bn).
COMPANY DESCRIPTION
Enauta (ENAT) is a Brazilian company engaged in
exploration and production of oil and gas. Founded in
1980, Enauta's main asset is the Manati Field.
Industry outlook
Reflecting the rising negative effect on demand of the
COVID-19 outbreak and the breakdown of OPEC+, we
forecast 2020 oil demand down -1.2Mbd, or -1.2% (with a
cut of ~2.9Mbd for 1H20). The inability of OPEC+ to
address this demand shock and collapse in consensus seem
to have ignited a market share war. Our LT analysis shows
a full-cycle, incentive-based normalised oil price of around
$60-$80/bbl. However, the impact of the projected 2020
market and likelihood that spare capacity is utilised more
fully than previously leads us to set 24/25E at the low end
of that.
LatAm Oil & Gas 16 April 2020
Revenue by field (%)
1,400
40%
1,200
35%
30%
1,000
25%
800
20%
600
15%
400
10%
200
5%
0
0%
2019
2020
Atlanta
2021
2022
Manati
2023
2024
Manati % of rev
Source: Company and UBS estimates
fernando.siqueira@
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 29
Enauta: Upgrading to Buy; decreasing PT to R$13
After ENAT unveiled its value and climbed c70% starting in October 2019, we
believed the market had priced in most of the definitive system's upside potential.
However, the O&G industry has turned upside down, given the impact of COVID19 and the subsequent oil price war, which led Brent and WTI prices to collapse.
At the same time, since the beginning of the year, the stock price has decreased
50%, slightly less than Brent prices, which fell 60%.
We think the stock price has overreacted to the oil price movement, mainly due to
the company's financial position, with net cash of cR$1.45bn. Thus, we are
upgrading our rating to Buy from Neutral, while decreasing our PT to R$13 from
R$17, while still not including the definitive system, with updated financials
(including the oil curve) and 4Q19 results. However, we acknowledge the risks
have increased due to the current oil price and supply-demand equation. Upside
potential remains from the definitive system and the possibility of farm-outs in 3
blocks (2 PAMA and 1 FZA), but we view that as less significant.
Measure in order to deal with the challenging scenario
Enauta released measures in under to deal with the Covid-19 outbreak. As per is
material fact, Enauta has focused on supporting the health and safety of its
employees and contractors; implementing operational and financial measures
aimed at strengthening the sustainability of their business should the current crisis
have more severe and lasting impacts, including effects on the Manati Field gas
sales contract.
The company has more than R$1.5 billion in net cash and hedge of approximately
30% of its estimated oil production in 2020, Enauta believes it is well positioned at
this time of crisis and volatility. From this form, the company's investment plan is
maintained for the next two years, including the schedule for drilling the first well
in the Sergipe-Alagoas Basin in early 2021. Regarding Manati field, where the
company holds 45% in WI, the total gas production is sold to PBR and due to the
current environment the unique buyer has requested force majeure in its supply
contract. However, the company does not agree with the PBR position.
Figure 41: 1Q20 production
Manati
Total production (mn m³)
Average production (mn m³/d)
ENAT production (WI: 45%)
Figure 42: Atlanta and Manati: production forecast
1Q20
35.0
181.40
30.0
2.00
25.0
81.60
20.0
5.0
4.5
4.0
3.5
3.0
2.5
Atlanta
1Q20
15.0
2,064.40
10.0
22.70
5.0
ENAT production (WI: 50%)
1,032.20
0.0
Net offload by ENAT (k bbl)
1,047.00
Total production (k bbl)
Average production (kbd)
Source: UBS estimates
2.0
1.5
1.0
0.5
0.0
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
Atlanta prod.(kbd)
3Q20
4Q20
2021
2022
2023
2024
Manati prod.(mn m³/d)
Source: UBS estimates
With regard to the results of 2019, the management proposed total dividend
distribution of R$300 million, or about R$1.14 per share, which will be deliberated
in a Board Meeting to be held on April 16, 2020. Even after the distribution of this
amount, Enauta will remain with solid liquid cash position. Additionally, receivables
of US$144 million are expected to be received from to the sale of a stake in Block
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 30
BM-S-8, payment for which will be made after the signing of the Individualization
of Production.
In addition, Enauta is evaluating the next steps related to the Atlanta Field
Definitive System, where it is the operator and holds a 50% stake, with the
objective of adapting the project to this new Brent scenario and make it resilient to
lower commodity prices. As we mentioned before, we believe that at the current
oil prices the feasibility of the DS could be at risk. The company has also released
its 1Q20 production, which came below our expectation both in Atlanta, mainly
due to the 20 days maintenance stoppage, and Manati.
Tough decision during storm: Upgrading to Buy
Before the recent impact of COVID-19 and oil price collapse, most of the stock's
upside potential was priced in, including the reserve review and a lower Brent
discount. However, the O&G industry has turned upside down. As one of ENAT's
most important decisions, Atlanta's definitive system has become much more
challenging in the current scenario and unfeasible at current oil prices, which may
lead the company to postpone the decision or re-think the project. However, we
believe the O&G gas project is aimed for the long term; it remains cash flowpositive in our base case, even with oil prices around USD40/bbl. Thus, we are
upgrading our rating to Buy, as we believe most of the downside risks are priced
in.
Manati, Atlanta and exploratory assets: Back to the drawing board
Future farm-outs and the drilling of the first well in SEAL around 2021 are likely to
add value to the company, but we do not take this into account. The company has
already stated that it expects to start the abandonment of Manati in 2023-24 and
the asset could become a gas reservoir. Additionally, Manati's stake of Enauta's
total revenue has decreased substantially and may reach c20% in upcoming years,
turning the company into an oil-driven one. Regarding the Atlanta field, the base
case is to drill 5 wells that will be connected to the current 3 to an FPSO of 50kbd,
with potential addition of 4 wells. For 2020, the company guided for an average of
30kbd. However, we think most of those plans are closely linked with oil prices.
Model update: 4Q19 results, new oil curve and macro updates
We are updating our model following 4Q19 results. After adjustments to our oil
price and macroeconomic forecasts, we are updating important variables in our
model to reflect improved prospects in Atlanta and Manati. We are decreasing our
PT to R$13/share from R$17/share, mainly on the back of lower oil prices in
Atlanta (-R$4/share) and a reserve update (-R$2/share). We are updating our
discount for Atlanta oil from US$12/bbl to US$10/bbl in relation to Brent prices.
However, this effect is more than offset by the recent drop in international oil
prices.
LatAm Oil & Gas 16 April 2020
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 31
Figure 43: Price target change – old vs. new
Source: UBS estimates
We do not include the definitive system in our base case but we see significant
upside potential of around R$4/share, with NPV of US$9.6/bbl, taking into account
the recent news regarding the definitive system. We believe other short-term
catalysts, such as the SEAL basin exploratory campaign and farm-outs in other
exploratory fields, may also provide upside for the investment case.
We acknowledge that Atlanta project returns are completely linked to oil prices
and we will be watching for the options the company may adopt. The company's
current asset portfolio, in addition to its cash position, helps limit the downside of
the case. The cash position brings some stability to the investment case but future
capex commitments may add some risk.
Model update: 4Q19 and forecast
We are updating our model following 4Q19 results. After adjustments to our oil
price and macroeconomic forecasts, we are updating important variables in our
model to reflect improved prospects in Atlanta and Manati. The impact on the
SOTP valuation summary is in Figures 44-45.
Figure 44: Old SOTP
Enauta SOTP
Figure 45: New SOTP
Value
($/boe)
Value
($m)
Value
(BRL/sh)
Enauta SOTP
Value
($/boe)
Value
($m)
Value
(BRL/sh)
Res erves
5.94
774
11.65
Res erves
4.30
367
6.67
Manati
8.73
158
2.38
Manati
2.59
35
0.64
Atlanta/Oliva
5.49
615
9.27
Atlanta/Oliva
4.62
332
6.03
Value ($m)
(BRL/sh)
Value
($m)
(BRL/sh)
131
2.38
Cash from Carcará
131
Total
1.97
13.6
Value
($m)
Cash from Carcará
Value
(BRL/sh)
Net cash
456
6.87
Overhead cost
(135)
(2.03)
9.1
Total
Value
($m)
Net cash
Overhead cost
Value
(BRL/sh)
384
6.98
(100)
(1.81)
Total
322
4.84
322
18.5
Total
Core value
284
284
5.17
Core value
(1.27)
Exploration commit.
(70)
(1.27)
17.00
Total
214.20
13.00
Exploration commit.
Total
Source: UBS estimates
LatAm Oil & Gas 16 April 2020
(85)
237.17
14.2
Source: UBS estimates
fernando.siqueira@
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 32
Figure 46: Financial estimates: Old vs. new
R$ (Old)
Net Revenues
EBITDA
Net Income
EPS
2020
1,410
721
719
2.75
2021
1,411
729
362
1.38
2022
1,384
715
420
1.61
2023
1,264
622
396
1.51
2024
n.a.
n.a.
n.a.
n.a.
R$ (New)
Net Revenues
EBITDA
Net Income
EPS
2020
865
276
(253)
(0.97)
2021
1,179
575
69
0.26
2022
1,221
638
185
0.71
2023
1,190
619
198
0.76
2024
1,135
583
212
0.81
Change (%)
Net Revenues
EBITDA
Net Income
EPS
2020
-38.6%
-61.7%
-135.2%
-135.2%
2021
-16.5%
-21.1%
-80.9%
-80.9%
2022
-11.8%
-10.7%
-55.9%
-55.9%
2023
-5.8%
-0.4%
-50.0%
-50.0%
2024
n.a.
n.a.
n.a.
n.a.
Source: UBS estimates
Net income has been impacted negatively by EBITDA generation and lower interest
rates, as the company has a net cash position. We are updating our reserve
numbers for Atlanta and Manati along with the latest update of ENAT numbers.
For Manati, we are changing the abandonment cost estimate to US$60m from
US$200m, in line with Wood Mackenzie's forecast, along with an updated gas
production curve in line with the GCA forecast.
Where could we be wrong and what are the potential risks?
As we have discussed, we believe there is an interesting upside asymmetry to
ENAT's investment case. However, as with every oil company, the intrinsic risk of
its business is relatively high. As we discussed in a previous report, we still foresee
major risks for Atlanta coming from oil prices, with our base case for long-term oil
prices at US$60/bbl. At this point, we believe most investors have a lower oil price
factored into their curves, which explains ENAT's current stock price.
Production also may be a risk; the current production level could be impacted by
higher-than-expected depletion in the field, which could also impact ENAT's FCF.
In addition, ENAT's partners in some blocks are well capitalized (Exxon and
Murphy) and could decide to speed up drilling activity, which could lead to a cash
drain in the short term, but we view that as less likely in the short term due to
global E&P capex cuts. Additionally, the company has informed shareholders that
CEO Mr. Lincoln Guardado will step down temporarily for personal reasons. The
company picked CFO and IR manager Paula Costa Côrte-Real as the temporary
CEO.
Is Atlanta's definitive system at risk?
As we discussed in Atlanta's Upside Optionality, we believe the definitive system
has significant upside potential, but with the lower oil prices, this upside could be
very limited. Due to a lack of clarity on some important project variables, we are
adopting a more conservative approach and leaving Atlanta only as upside
potential.
What do we know?
As per Brasil Energia news, Enauta is about to start the first contracting of goods
and services to the definitive system of Atlanta, its heavy oil field located in the
LatAm Oil & Gas 16 April 2020
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 33
Santos Basin. The company sent ANP solicitation to change some technical details
of the area's development plan, and Enauta is preparing to send invitations until
the beginning of March for bidding on chartering an FPSO for 20 years.
Reportedly, the platform will be medium-sized, with capacity to produce 50kbpd
and to store 1mboe. Until the beginning of the year, the company has been
working with options varying between 50-70kbpd. According to news reports, the
adjustments submitted to the ANP are not public, but news sources affirm that
there are no significant changes to the original plan, as elaborated by Shell, when
it was the operator of the asset.
Operations are expected to start between the end of 2022 and the beginning of
2023. The exact date of the first oil will depend mainly on the market's reaction to
the FPSO contracting. As the FPSO market was heated prior to the shock in oil
prices, Enuata's competition is uncertain. One of the alternatives being considered
is FPSO OSX 2, which is halted outside Brazil and would require the work of
adaptation in the production plant and in the turret.
Given the type of FPSO, the dispute over contracting could attract the attention of
operators such as Ocyan, Teekay, Bumi Armada and Bluewater. With Teekay
operating the anticipated system of production in Atlanta (FPSO Petrojarl 1,
installed since 2018), the expectation is that the group has certain bidding
advantages, as it already has commercial relationships with Enauta, and it knows
more about the details of the project. The provisional system is connected to 3
wells and has been producing around 30kboed.
Estimated at US$1.5bn, the definitive system of Atlanta will have a total of 12
wells, and its implementation will be divided in two phases. In the first step, it will
connect 8 producing wells, 3 or 4 of which will be reallocated from the provisional
system.
Enauta's plan is to start drilling the remaining wells of the first phase in 2022,
which will create demand to charter a rig in 2021. The second stage will include 4
additional wells. Besides the development plan of production in the definitive
system, the company expects to drill an exploration well to search for other
prospects identified in the area.
Enauta is willing to maintain production of 30kbpd in the provisional system and
could drill a new producing well in 1Q21, a plan approved by the company's
board, which has already ordered the subsea equipment. In case oil volume
declines, Enauta could look to the market at the end of 2020 to contract a rig.
With new information in place, what is the upside potential?
In a recent report, we disclosed our study about the two potential sizes of the
definitive system's FPSO, 50kbd and 70kbd. However, as we discussed in our 23
Dec 2019 Lighthouse note and confirmed in 4Q19, the company choose the
50kbd system.
LatAm Oil & Gas 16 April 2020
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 34
Figure 47: FPSO with 50kbd capacity NPV per barrel, taking oil
prices into account
14.40
9.80
7.50
5.20
2.50
40.00
50.00
60.00
70.00
80.00
Source: UBS estimates
Sensitivity to main drivers
Running some sensitivity scenarios of the company's definitive system model,
taking into account some of the most important variables of the project, we see a
sizeable variation even playing them out separately. In the case of long-term oil
prices, Brent price movement exerts a strong influence on the field's valuation. The
discount of Atlanta's oil prices in relation to the Brent benchmark has the same
magnitude.
Figure 48: Valuation vs. long-term Brent price (US$/bbl)
Source: UBS estimates
Anticipated production system
FPSO Petrojarl I arrived in Atlanta in early January 2018. It will have capacity to
produce 30kbd. By that time, the consortium drilled two wells in the field and
management indicated it would drill a third well. Given delays from Teekay, Enauta
negotiated the day-rate in the first 18 months to drop to US$410k/d from
US$500k/d.
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 35
Figure 49: Production in Atlanta from anticipated production system (bpd)
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2018
2019
2020
2021
2022
2023
2024
Source: ANP, UBS esitmates
Atlanta's first oil occurred on 2 May 2018, after the required tests and licenses.
However, due to a mechanical issue with the well pump and the use of the pump
in the seabed, production is likely to stabilize 10-20% below the initial guidance of
20kbd. During the first 18 months of production, overall opex could be close to
US$410k/d, given the 15% reduction in the FPSO.
Updating reserves
As per data released by independent consultant Gaffney Cline & Associates (GCA)
on 12 March 2020, total 1P reserves were c143mbbl and 2P reserves were
c181mbbl. We are updating our reserve value to reflect the full value of the field,
becoming more conservative in our forecast but still fairly pricing the field's
potential value.
Figure 50: Enauta's gross reserves audited by GCA (mbbl)
Figure 51: Enauta's net reserves audited by GCA (mbbl)
103.1
206
90.5
181.1
71.9
143.8
182.5
158
91.3
79
63.7
127.4
16.4
23.1
23.5
8.2
11.5
1P
2P
3P
1P
2P
Developed
Undeveloped
Source: Company and UBS estimates
Total
Developed
Undeveloped
11.8
3P
Total
Source: Company and UBS estimates
Is the cash cow weakening?
Manati was always Enauta's well-known cash cow, delivering supportive cash flow
to the company without strong volatility in its numbers. However, the company
has stated that will come to an end within the next 3-4 years. Taking into account
Manati's current position in the company's operational figures, Enauta will be
transformed into an oil company from a gas company, which may increase risk
perception due to a higher percentage of its revenue being pegged to oil prices
(Atlanta figures) than to natural gas (Manati figures).
LatAm Oil & Gas 16 April 2020
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 36
Figure 52: Manati production million m³ per day
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2018
2019
2020
2021
2022
2023
2024
Source: Company and UBS estimates
Fading out: Manati's contribution to the top line will decrease
In 2018, Enauta's top line was composed of 65% Manati and 35% Atlanta. Last
year, the figures already changed a lot and Atlanta represented 65% of Enauta's
total revenue. Our forecast for upcoming years is that the number for Atlanta
could increase even more; in 2020E, it could come in at 77% and increase to 85%
in 2023E.
Figure 53: ENAT revenue breakdown and Manati participation (R$ m)
1,400
40%
1,200
35%
30%
1,000
25%
800
20%
600
15%
400
10%
200
5%
0
0%
2019
2020
2021
Atlanta
Manati
2022
2023
2024
Manati % of rev
Source: UBS estimates and company
Exploratory asset farm-out: More to come?
Enauta's CEO said he is waiting for an environmental license to drill in blocks
PAMA-M-265 and PAMA-M-337, operated by the company, with 100% in the
Pará-Maranhão Basin. He also stated that in December, an application was sent to
Ibama for a 3D seismic acquisition license for blocks SEAL-M-351 and SEAL-M-428.
Acquired in the 13th round of the ANP, the areas are operated by ExxonMobil
(50%), in partnership with Enauta (30%) and Murphy Oil (20%). The company
also expects to start the drilling of the first well in SEAL in late 2020 and early
2021. We believe it could be another trigger for the investment thesis, although
time remains until work begins.
Enauta holds stakes in nine blocks in the Sergipe-Alagoas Basin, two in ParáMaranhão, two in the Espírito Santo Basin, one in Foz do Amazonas, one in Ceará
and one in the Camamu-Almada Basin. Besides Atlanta, it has participation in the
Manati field in Camamu-Almada.
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 37
Buy * (Price target US$15.00)
Ecopetrol SA
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS
Q: Would two years of Brent below US$50/bbl make Ecopetrol's operations unfeasible?
No. We believe the company's strong cash position and low leverage rate will support its operations
despite the pressured environment, with a lockdown in Bogotá and lower oil prices.
UBS VIEW
Although we thought the upstream segment may be a risk due to low reserves and reserve life, we
started to become more positive due to recent acquisitions. In its 2020-22 business plan, Ecopetrol
guided increasing production by 10% until 2022, replacing at least 100% of its production,
considering US$57/bbl. However, with oil prices around US$30-40/bbl, we believe it might face a
reserve reduction in 2020, in addition to pressured figures. With that in mind, we believe the chances
of the company delivering on its aforementioned guidance are much lower, as it was considering
US$57/bbl and UBS oil price estimates remain below that level until 2023. On the other hand, we
believe the company's quick adjustments to its 2020-22 business plan and strong cash position will
help it endure during this challenging year.
EVIDENCE
Ecopetrol has net income break-even of US$30/bbl, along with a strong cash position of US$3bn and a
good balance sheet. Its management was the first among our coverage to announce adjustments to its
business plan, adapting its capex guidance and costs to protect its cash flow generation.
WHAT'S PRICED IN?
Ecopetrol's stock price has dropped over 54% YTD, greater than the over 40% fall in oil prices. Besides
oil prices, investors are also pricing in a higher risk perception in the company's ability to grow
production, reserves and reserve life for the next two years. However, they are not considering the
company's strong cash position and management's disciplined capital allocation discipline, which
helped the company to deleverage at a very fast pace (2y), not exceeding 1.5x ND/EBITDA since 2017.
UPSIDE / DOWNSIDE
SPECTRUM
Value drivers
$23 upside
$15 base
$5 downside
Average ST Oil
prices
US$59
US$51
US$47
Refinery
utilization (YoY)
0%
-5%
-10%
Production
growth
3.0%
2.8%
0%
Source: UBS estimates
COMPANY DESCRIPTION
Created in 1951, Ecopetrol is a publicly-owned Colombian company that operates in the production,
refining and transportation of oil and gas, as well in petrochemical activities.
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 38
Ecopetrol SA
UBS Research
UPSIDE / DOWNSIDE SPECTRUM
Source: UBS estimates
Risk to the current share price is skewed (1.8:1) to the upside
EC is trading at US$11.43 (as of 14 April).
Upside (US$23): In our upside scenario, we foresee an oil price oil curve of US$59/bbl,
production growing 3% YoY in 2020E and a flat refinery utilization rate.
Base (US$15): In our base case, we consider oil price curve of US$51/bbl, with production lower
than the lower band of the guidance of 738kboed, with the refineries throughput 5% lower
YoY.
Downside (US$5): In our downside scenario, we consider an oil price curve of US$47/bbl, with
production flat YoY and the refinery utilization rate decreasing 10% compared with 2019.
COMPANY DESCRIPTION
Created in 1951, Ecopetrol is a publicly-owned Colombian
company that operates in the production, refining and
transportation of oil and gas, as well in petrochemical
activities.
Industry outlook
Reflecting the rising negative effect on demand of the
COVID-19 outbreak and the breakdown of OPEC+, we
forecast 2020 oil demand down -1.2Mbd, or -1.2% (with a
cut of ~2.9Mbd for 1H20). The inability of OPEC+ to
address this demand shock and collapse in consensus seem
to have ignited a market share war. Our long-standing
analysis shows a full-cycle, incentive-based normalised oil
price of around $60-$80/bbl. The impact of the projected
2020 market and likelihood that spare capacity is utilised
more fully than previously leads us to set 24/25E at the low
end.
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 39
EC: Model update: Upgrade to Buy and decrease
PT to US$15
As we have discussed, EC is the integrated company that is most correlated to oil
prices among our coverage (85% correlated to Brent in three years). Therefore, its
investment case depends considerably on the oil price scenario. Notably,
Ecopetrol's stock price has dropped 54% YTD, greater than the 44% fall in oil
prices. We believe this higher decrease is due to the higher risk perception of the
company's ability to grow production, reserves and reserve life for the next two
years.
Although we thought the upstream segment may be a risk due to low reserves
and reserve life, we started to become more positive due to recent acquisitions. In
its 2020-22 business plan, Ecopetrol guided increasing production by 10% until
2022, replacing at least 100% of its reserves, considering US$57/bbl. However,
with oil prices around US$25-35/bbl, we believe it might face a reserve reduction
in 2020, in addition to pressured figures.
With that in mind, we believe the chances of the company delivering on its
aforementioned guidance are much lower, as it was considering US$57/bbl and
UBS oil price estimates remain below that level until 2023. On the other hand,
Ecopetrol currently has a strong cash position, of around US$3b, with committed
credit lines of US$600m, available to the short-term, with 3.5y remaining to their
maturity. For 2020, it has a debt rollover of US$0.5b, which they should not face
difficulties to pay.
It's worth noting that that the company may request a credit for US$665m with
international banks in order to finance its investments for 2020-2021, as per La
Republica news. Reportedly, the Ministry of Finance and Public Credit authorized
EC to contract a loan in the form of a line committed to international banking, for
an amount of up to US$665m to improve the liquidity of the company.
We believe Ecopetrol is well-prepared to face the oil crisis and the lower demand
from the Covid-19 outbreak on the back of its strong cash position along with the
quick adjustments to its 2020-22 business plan, which will help it endure this
challenging year. Therefore, we are lowering our PT to US$15/bbl from US$18/bbl,
and upgrading the stock to Buy, from Neutral.
Figure 54: PT: Old vs. new
18
11
9
15
Capex
New PT
1
Old PT
Oil price
Net debt
Source: UBS estimates
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 40
We are rolling over our model following 4Q19 results, incorporating our forecast
to 2024. After adjustments to our oil price and macroeconomic forecasts, we are
also updating important variables such as production, refineries utilization rates
and capex.
In 2018 we held a conservative approach on Ecopetrol as the company had a very
strict capital management with low geographic diversification, which led it to a
slow pace on the progress over profitability and E&P, with low visibility into longterm growth (link).
However, the company started to address this issue and rose investments by 47%
in 2019, the highest in 4 years, maintaining leverage below 1.0x. Ecopetrol
announced several acquisitions (link), such as: 1) the Gato do Mato deal; 2) the JV
with Oxy for the unconventional project in the Permian to develop 97k net acres in
the Permian basin; 3) news of the acquisition of the Pau-Brasil area in Brazil's
Santos Basin; and 4) four blocks in the Gulf of Mexico. All of them contributed to
the company's 169% reserve replacement ratio in 2019, along with an increase in
reserve life to 7.8 years. That was one of the main reasons why we started to
become more positive over the investment case.
For 2020, the company initially guided for a capex of US$4.5-5.5b, an increase of
8-32% vs 2019. However, with the hefty decline in oil prices, Ecopetrol announced
a cut to US$3.3-4.3b. While the lower end of the new guidance represents a drop
of 21% YoY and the higher end corresponds to a slight increase of 3%, we do not
think it should harm its growth prospects in the long-term, as the amount is still
above its maintenance capex and the investment program was aggressive, in our
view.
Having that in mind, we adjusted our capex in the model, which was at the high
end of the first guidance, at US$5b, to the lower end of the new guidance, to
US$3.3b, delaying the capex to the next years at a much moderate pace. That
change partially offset the negative impact from oil prices (US$11/share) leading to
a benefit of US$9/sh. These new assumptions lead us to decrease our PT to
US$15/share from US$18/share.
It's worth noting that Ecopetrol has announced an amendment to its 2020-22
business plan on the back of the oil price shock. The actions involve: 1) a COP$2
trillion cutback in costs and expenses; 2) new commercial strategies to maximize
the value of crudes and products sold; 3) a US$1.2bn decrease in the 2020
investment plan so that the new range of the investment plan reaches US$3.34.3bn, as aforementioned; and 4) a new dividend payment model, consisting of a
first payment of 100% of the dividend to minority shareholders and 14% of the
dividend to the majority shareholder, to be made on April 23rd, 2020; and
payment of the remaining 86% of the dividend to the majority shareholder to be
disbursed during 2H20.
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 41
Figure 55: Financials: Old vs. new
US$m (old)
2019
2020
2021
2022
2023
20,940
18,489
21,239
23,032
23,297
n.a
EBITDA
9,552
8,320
9,557
10,364
10,484
n.a
Net Income
3,669
2,983
3,723
4,152
4,150
n.a
1.78
1.45
1.81
2.02
2.02
n.a
Net Revenues
EPS
US$m (new)
2024
2019
2020
2021
2022
2023
2024
21,597
5,236
10,086
13,888
16,544
18,487
EBITDA
9,498
2,252
4,539
6,666
7,941
8,874
Net Income
4,033
-998
584
1,811
2,566
3,113
EPS
1.96
-0.49
0.28
0.88
1.25
1.51
Change (%)
2019
2020
2021
2022
2023
2024
3%
-72%
-53%
-40%
-29%
n.a
-1%
-73%
-53%
-36%
-24%
n.a
Net Revenues
Net Revenues
EBITDA
Net Income
10%
-133%
-84%
-56%
-38%
n.a
EPS
10%
-133%
-84%
-56%
-38%
n.a
Source: UBS estimates
Figure 56: Old WACC
Figure 57: New WACC
US$
Risk Free
Country Risk premium
Mkt Premium
Beta
Ke (US$)
Comments
2.3%
US Treasury 30y bond Nov 19
2.55%
Damodaran Country risk
5.5%
Equity risk of 5.5%
1.4
Reuters Market Beta
12.6%
US$
Risk Free
Country Risk premium
Mkt Premium
Beta
Ke (US$)
Comments
2.3%
US Treasury 30y bond Nov 19
2.55%
Damodaran Country risk
6.0%
Equity risk of 6.0%
1.4
Reuters Market Beta
13.3%
Equity/Total Capital
60%
Equity/Total Capital
60%
Debt/Total Capital
40%
Debt/Total Capital
40%
Tax Rate
33%
Tax Rate
33%
Kd (US$)
5.8%
Kd (US$)
5.8%
WACC (US$)
9.12%
Source: UBS estimates
WACC (US$)
9.54%
Source: UBS estimates
Although Ecopetrol reiterated its production target of 745-760kboed, it was
considering oil prices at US$57/bbl; therefore, with UBSe of oil prices at
US$35.3/bbl (c38% lower), we think it's unlikely to deliver growth of 2.8-5.0%.
We estimate production reaching 738kboed, lower than the lower end of the
company's target.
However, it's worth reminding that the company is long on oil prices, and
therefore, it continues to present consistent EBIT growth as it follows the UBSe of
oil price recovery throughout the next years.
LatAm Oil & Gas 16 April 2020
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 42
Figure 58: Old DCF
EC DCF Summary
EBIT
4Q19
2019
2020
2021
2022
2023
4,998
21,625
18,682
NOPAT
3,348
14,488
12,517
16,005
18,037
18,114
DD&A
2,359
8,650
9,511
10,041
10,235
10,286
23,888
26,921
27,036
WC
(1,338)
(1,338)
208
(1,132)
(629)
(32)
CAPEX
(3,739)
(11,040)
(16,943)
(17,750)
(17,925)
(16,020)
FCFF (COP bn)
630
10,760
5,293
7,163
9,718
12,348
FCFF (USD mn)
185
3,282
1,562
2,018
2,711
3,469
Perpetuity (USD mn)
DCF
51,245
198
1,528
1,809
2,228
41,204
Source: UBS estimates
Figure 59: New DCF
EC DCF Summ
2020
2021
2022
2023
2024
Perpetuity
EBIT
(2,803)
5,586
12,697
17,009
20,174
20,174
NOPAT
(1,878)
3,743
8,507
11,396
13,516
13,516
DD&A
10,680
11,434
11,202
11,262
12,460
12,460
WC
CAPEX
FCFF (COP bn)
FCFF (USD mn
309
(2,956)
(1,049)
(798)
(591)
(591)
(11,976)
(12,000)
(12,189)
(12,460)
(12,460)
(12,460)
(2,866)
221
6,471
9,399
12,926
12,926
(798)
59
1,805
2,640
3,631
3,631
(798)
54
1,504
2,009
2,522
37,633
Perpetuity (USD mn)
DCF
50,552
Source: UBS estimates
Figure 60: Old equity bridge
Figure 61: New equity bridge
g
g
2.2%
2.2%
NAV USD mn
46,968
NAV USD mn
42,923
Net Debt USD mn
(10,231)
Net Debt USD mn
(11,406)
Minorities @ BV
Value USD mn
# ADR
(619)
36,117
2,056
Source: UBS estimates
Minorities @ BV
(1,197)
Value USD mn
30,321
# ADR
2,056
Source: UBS estimates
Right focus and strategy leading to safer position amidst challenging
scenario
We like Ecopetrol's focus on profitability by investing in E&P. Although its reserve
life is much lower than those of its main peers, Ecopetrol has been looking for
ways to resolve this issue after a long period during which management seemed
comfortable with a low reserve life and investment.
There have been several acquisitions (link), such as: 1) the Gato do Mato deal; 2)
the JV with Oxy for the unconventional project in the Permian to develop 97k net
acres in the Permian basin; 3) news of the acquisition of the Pau-Brasil area in
Brazil's Santos Basin; and 4) four blocks in the Gulf of Mexico. All of them
contributed to the company's 169% reserve replacement ratio in 2019, along with
an increase in reserve life to 7.8 years, leading us to become more positive on the
upstream.
LatAm Oil & Gas 16 April 2020
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 43
Management's shift in focus to E&P and rapid amendments to its business plan
leads us to think management is well prepared to face the challenging scenario.
We think Ecopetrol also benefits from a strong cash position, as aforementioned,
which could help the company fund investments and maintain its leverage ratio at
controllable levels. Despite its ND/EBITDA hiking to 4.3x in 2020E, we believe the
company will reduce its leverage rapidly, reaching 2.0x in 2021E and 1.5x in
2022E.
Ecopetrol's management has already shown its ability to control leverage ratios in
the past. After delivering a ND/EBITDA of 4.6x in 2016, it applied a very strict and
disciplined capital management policy, which led to a reduction to 1.4x in two
years. Therefore, we are confident that the company will be able to control
leverage ratios, especially as it has a significant amount of cash and it has delayed
investments.
However, it's worth noting that the significant decline in oil prices is likely to
pressure the improved upstream figures and lowers visibility regarding sustainable
growth and production growth over the long run.
On the same way that oil price movement is viewed as a risk to the case, it could
also be seen as upside potential. As we have noted, Ecopetrol's stock price is 85%
correlated to oil prices (considering a 3-year period). Therefore, any upward
movement in the oil price could raise the stock price. With the new UBS oil curve,
the stock should suffer most in Q2, but it should gradually improve as oil price
increases, reaching US$40/bbl in the year-end. Investors are currently pricing LT oil
prices at US$50/bbl, considerably UBSe of US$60/bbl. Therefore, we see an upside
potential to the stock, which investors do not seem to be pricing in.
Figure 62: EC stock vs. Brent
Source: Reuters and UBS estimates
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 44
Ecopetrol SA (EC.N)
12/16
15,698
5,221
(2,497)
2,724
0
(397)
(2)
2,325
(1,536)
788
(274)
0
514
0
514
0.7
12/17
18,716
8,052
(2,803)
5,249
0
(848)
12
4,413
(1,912)
2,501
(265)
0
2,236
0
2,236
1.9
12/18
22,919
10,414
(2,600)
7,814
0
(688)
56
7,182
(2,500)
4,682
(329)
0
4,353
0
4,353
0.4
12/19E
21,597
9,498
(2,612)
6,886
0
(510)
109
6,485
(1,431)
5,055
(381)
0
4,674
0
4,674
0.2
% ch
-5.8
-8.8
12/16
0.25
0.25
0.25
0.26
0.00
7.08
2,056
12/17
1.09
1.09
1.09
0.25
0.00
7.80
2,056
12/18
2.12
2.12
2.12
0.74
0.00
8.56
2,056
12/19E
2.27
2.27
2.27
2.04
0.00
8.35
2,056
% ch
12/16
3,320
2,684
6,004
28,197
0
6,225
40,426
0
0
0
17,403
7,920
25,323
14,554
549
40,426
29,186
(14,083)
12/17
3,106
3,582
6,688
27,677
0
6,037
40,402
0
0
0
14,580
9,155
23,735
16,037
630
40,402
28,141
(11,474)
12/18
2,510
4,091
6,601
26,416
0
5,830
38,846
0
0
0
11,713
8,885
20,598
17,606
643
38,846
27,452
(9,203)
12/19E
3,142
3,457
6,599
28,392
0
6,239
41,229
0
0
0
11,640
11,221
22,861
17,171
1,197
41,229
26,866
(8,498)
% ch
12/16
788
2,488
1,725
1,450
6,451
(1,678)
4,773
(1,956)
(561)
0
1,612
3,868
0
3,868
12/17
2,501
2,803
707
442
6,453
(2,011)
4,442
192
(510)
0
(4,010)
113
0
113
12/18
4,682
2,600
1,181
852
9,315
(2,825)
6,490
(285)
(1,497)
0
(3,557)
1,150
0
1,150
12/19E
5,055
2,612
1,699
1,317
10,683
(4,159)
6,524
941
(4,200)
0
(1,949)
1,317
0
1,317
% ch
Income statement (US$m)
Revenues
EBITDA (UBS)
DD&A and exploration
EBIT (UBS)
Assoc and other inc (UBS, pre-tax)
Net interest
Other pre-tax items
Profit before tax (UBS)
Tax (UBS)
Profit after tax (UBS)
Minorities
Other post-tax items
Net earnings (UBS)
Exceptionals/Extraordinaries
Net earnings (reported)
Tax rate (%)
Per share (US$)
EPS (reported, diluted)
EPS (UBS, basic)
EPS (UBS, diluted)
Net DPS (US$)
Cash EPS (UBS, diluted)
Book value per share
Average shares (diluted)
Balance sheet (US$m)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Common s/h equity
Minority interests
Total liabilities & equity
Total capital employed
Net (debt) cash
Cash flow (US$m)
Net earnings (reported) pre MI
DD&A and exploration expensed
Net change in working capital
Other (operating)
Operating cash flow
Capital expenditure
Equity free cash flow
Net (acquisitions) & disposals
Dividends paid
Share issues / (buybacks)
Net other cash flows
Cash flow (inc)/dec in net debt
FX / non cash items
Dec / (inc) in net debt
-0.5
-11.9
25.9
94.4
-9.7
42.8
8.0
-15.8
-
7.4
-
7.4
-33.9
7.4
7.4
7.4
175.1
-2.5
0.0
25.2
-15.5
0.0
7.5
7.0
6.1
-
-0.6
26.3
11.0
-2.5
86.1
6.1
-2.1
7.7
7.4
0.45
43.8
54.7
14.7
-47.2
0.5
-180.5
45.2
14.5
-
14.5
12/20E
5,236
2,252
(2,974)
(721)
0
(575)
0
(1,297)
428
(869)
(129)
0
(998)
0
(998)
0.3
% ch
-75.8
-76.3
-13.8
-
-12.8
-100.0
-
66.2
-
-
34.8
12/20E
(0.49)
(0.49)
(0.49)
0.00
0.00
6.93
2,056
% ch
12/20E
2,597
340
2,937
25,559
0
5,539
34,036
0
0
0
11,416
7,318
18,734
14,240
1,063
34,036
24,122
(8,819)
% ch
12/20E
(869)
2,974
57
(72)
2,090
(3,350)
(1,260)
0
0
0
1,114
(146)
0
(146)
% ch
-17.1
0.0
-17.3
-90.2
-55.5
-10.0
-11.2
-17.4
-
-1.9
-34.8
-18.1
-17.1
-11.2
-17.4
-10.2
-3.8
13.83
-96.6
-
-80.4
19.4
-
-
-
12/21E
10,086
4,539
(3,049)
1,490
0
(548)
0
942
(311)
631
(47)
0
584
0
584
0.3
12/22E
13,888
6,666
(3,125)
3,542
0
(620)
0
2,922
(964)
1,957
(146)
0
1,811
0
1,811
0.3
12/23E
16,544
7,941
(3,163)
4,778
0
(639)
0
4,139
(1,366)
2,773
(207)
0
2,566
0
2,566
0.3
12/21E
0.28
0.28
0.28
0.23
0.00
6.86
2,056
12/22E
0.88
0.88
0.88
0.70
0.00
7.55
2,056
12/23E
1.25
1.25
1.25
1.00
0.00
7.91
2,056
12/21E
2,901
2,182
5,082
25,036
0
5,394
35,512
0
0
0
12,168
8,197
20,366
14,112
1,035
35,512
24,414
(9,267)
12/22E
4,142
3,057
7,199
26,925
0
5,741
39,865
0
0
0
14,073
9,166
23,239
15,525
1,101
39,865
26,557
(9,931)
12/23E
5,385
3,636
9,021
27,414
0
5,774
42,209
0
0
0
15,279
9,555
24,834
16,268
1,108
42,209
27,269
(9,894)
12/21E
631
3,049
(788)
(835)
2,056
(3,200)
(1,144)
0
(467)
0
1,067
(544)
0
(544)
12/22E
1,957
3,125
(293)
(439)
4,351
(3,400)
951
0
(1,449)
0
1,116
617
0
617
12/23E
2,773
3,163
(224)
(431)
5,281
(3,500)
1,781
0
(2,053)
0
1,124
852
0
852
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
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 45
Ecopetrol SA (EC.N)
Operational data
Production (000 boe/d)
12/16
718
12/17
715
12/18
720
12/19E
725
12/20E
738
12/21E
766
12/22E
780
12/23E
787
Valuation (x)
P/E (reported, diluted)
P/E (UBS, diluted)
P/CEPS (diluted)
Equity FCF (UBS) yield %
Net dividend yield %
P/BV
EV/EBITDA
EV/DACF
EV/EBIT
12/16
34.0
34.0
27.3
3.1
1.2
6.0
6.7
11.6
12/17
9.0
9.0
22.0
2.5
1.3
3.9
5.5
6.0
12/18
9.8
9.8
15.3
3.6
2.4
5.0
6.4
6.6
12/19E
5.0
5.0
27.8
17.9
1.4
3.4
3.6
4.6
12/20E
NM
NM
(5.4)
0.0
1.7
14.3
15.9
NM
12/21E
40.2
40.2
(4.9)
2.0
1.7
7.2
11.5
22.0
12/22E
13.0
13.0
4.0
6.2
1.5
5.0
7.2
9.4
12/23E
9.2
9.2
7.6
8.7
1.4
4.2
6.1
7.0
Debt adjusted cash flow (UBS)
Net earnings (reported) pre MI
DD&A and exploration expensed
Other non-cash items: Group
Other non-cash items: Associates
Post tax interest
Other
DACF (UBS)
12/16
788
2,488
1,450
0
0
0
4,726
12/17
2,501
2,803
442
0
0
0
5,746
12/18
4,682
2,600
852
0
0
0
8,134
12/19E
5,055
2,612
1,317
0
0
0
8,984
12/20E
(869)
2,974
(72)
0
0
0
2,033
12/21E
631
3,049
(835)
0
0
0
2,845
12/22E
1,957
3,125
(439)
0
0
0
4,643
12/23E
2,773
3,163
(431)
0
0
0
5,505
12/16
17,482
14,083
0
0
31,565
0
31,565
12/17
20,212
11,474
0
0
31,687
0
31,687
12/18
42,508
9,203
0
0
51,711
0
51,711
12/19E
23,498
8,498
0
0
31,996
0
31,996
12/20E
23,498
8,819
0
0
32,317
0
32,317
12/21E
23,498
9,267
0
0
32,765
0
32,765
12/22E
23,498
9,931
0
0
33,429
0
33,429
12/23E
23,498
9,894
0
0
33,392
0
33,392
Growth (%)
Upstream volumes
EBITDA (UBS)
EBIT (UBS)
EPS (UBS, diluted)
Net DPS
12/16
(5.6)
66.5
184.2
(70.7)
12/17
(0.4)
54.2
92.7
NM
(5.9)
12/18
0.7
29.3
48.9
94.6
197.8
12/19E
0.6
(8.8)
(11.9)
7.4
175.1
12/20E
1.9
(76.3)
-
12/21E
3.7
101.5
-
12/22E
1.9
46.9
137.8
NM
NM
12/23E
0.9
19.1
34.9
41.7
41.7
Profitability (%)
ROACE (UBS)
ROE (UBS)
12/16
2.7
3.6
12/17
8.7
14.6
12/18
16.8
25.9
12/19E
18.6
26.9
12/20E
-3.4
-6.4
12/21E
2.5
3.7
12/22E
7.3
11.1
12/23E
10.2
15.3
Capital structure & Coverage (x)
Net debt / EBITDA
Net debt / total equity %
Net debt / (net debt + total equity) %
Net debt/EV %
Capex / depreciation %
CAPEX / operating cashflow %
EBIT / net interest
Dividend cover (UBS)
Div. payout ratio (UBS) %
12/16
2.7
96.8
49.2
0.4
67.5
26.0
6.9
0.9
106.0
12/17
1.4
71.6
41.7
0.4
71.8
31.2
6.2
4.4
22.9
12/18
0.9
52.3
34.3
0.2
108.6
30.3
11.4
2.9
35.1
12/19E
0.9
49.5
33.1
0.3
159.2
38.9
13.5
1.1
89.9
12/20E
3.9
61.9
38.2
0.3
112.7
160.3
NM
0.0
12/21E
2.0
65.7
39.6
0.3
104.9
155.6
2.7
1.3
80.0
12/22E
1.5
64.0
39.0
0.3
108.8
78.1
5.7
1.3
80.0
12/23E
1.2
60.8
37.8
0.3
110.6
66.3
7.5
1.3
80.0
EBIT (UBS) by division (US$m)
Upstream
Downstream
Other
Total
12/16
812
2,173
(262)
2,724
12/17
2,504
2,745
0
5,249
12/18
5,124
2,218
472
7,814
12/19E
3,382
2,890
614
6,886
12/20E
(3,116)
2,401
(6)
(721)
12/21E
(886)
2,384
(8)
1,490
12/22E
898
2,653
(10)
3,542
12/23E
1,988
2,800
(10)
4,778
Enterprise value (US$m)
Market cap.
Net debt (cash)
Buy out of minorities
Pension provisions/other
Total enterprise value
Non core assets
Core enterprise value
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
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 46
Neutral * (Price target US$5.00)
YPF
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS
Q: Is YPF able to navigate lower oil prices in 2020?
Yes. We forecast US$2.7bn of EBITDA, but note YPF has higher risk to peers given debt maturities and
risk from the Argentine economy. That is explained as it had already been facing pressure in its
financial figures due to the freeze in oil and fuel prices occurred in the 2H19. The implementation of
the creole barrel is crucial as despite the higher pressure in the downstream segment, it will help the
upstream segment, allowing production to continue.
UBS VIEW
Lower oil prices have a negative impact on YPF's investment case, as they raise concerns about the
financial feasibility of shale fields that have a break-even close to US$40/bbl. In our integrated
coverage, YPF has the highest break-even, and we calculate it starts to burn cash at US$40/bbl in
2020. Therefore, we see a significant risk for the company's financial situation, although it may be
partially offset by the creole crude implementation, as it places a higher domestic oil price, allowing
production to continue. Therefore, we are lowering our PT to US$5/share from US$11/share and
maintain our Neutral rating.
EVIDENCE
The government recently decided to re-stablish the creole barrel, a reference price for crude oil
produced domestically, in order to avoid the paralysis in production. The price was still not defined, but
La Nacion news reported that it should be around US$40/bbl, which is close to the company's
breakeven level, but much more positive than the current US$20-30/bbl.
WHAT'S PRICED IN?
Investors are pricing a lower oil price curve in the long-term, at US$50/bbl and although the creation of
the creole crude is positive on the short-term, the street was still not able to price it in as the level at
which it will be stablished was not announced yet.
UPSIDE / DOWNSIDE
SPECTRUM
Value drivers
$8 upside
$5 base
$2 downside
Average ST oil prices
Utilization rate
US$59
US$51
US$47
89%
80%
72%
Production growth
YoY
3%
0%
-5%
Source: UBS estimates
COMPANY DESCRIPTION
YPF is a publicly-owned Argentine company and the nation's main producer of hydrocarbons. It
accounts for 43% of Argentina's oil and gas, and 58% of its gasoline production. Comprising three
industrial units, all located in Argentina, it generates fuels, petrochemicals and lubricants.
LatAm Oil & Gas 16 April 2020
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 47
YPF
UBS Research
UPSIDE / DOWNSIDE SPECTRUM
Source: UBS estimates
Risk to the current share price is skewed (2:1) to the upside
YPF is trading at US$4.00 (as of 14 April).
Upside (US$8): In our upside scenario, we see an oil price curve of US$59/bbl, a refinery
utilization rate of 89% and production growth of 3% YoY. (2020E EBITDA of USD2,801mn; EV
of US$9,869mn)
Base (US$5): In our base case, we assume an oil price curve of US$51/bbl in 2020E, a refinery
utilization rate of 80% YoY and production flat versus 2019.
Downside (US$2): In our downside case, we consider an average oil price curve US$47/bbl,
utilization rate of 72% and a 5% decline in production. (2020E EBITDA of USD2,161mn; EV of
US$8,266mn)
COMPANY DESCRIPTION
YPF is a publicly-owned Argentine company and the
nation's main producer of hydrocarbons. It accounts for
43% of Argentina's oil and gas, and 58% of its gasoline
production. Comprising three industrial units, all located in
Argentina, it generates fuels, petrochemicals and
lubricants.
Industry outlook
Reflecting the rising negative effect on demand of the
COVID-19 outbreak and the breakdown of OPEC+, we
forecast 2020 oil demand down -1.2Mbd, or -1.2% (with a
cut of ~2.9Mbd for 1H20). The inability of OPEC+ to
address this demand shock and collapse in consensus seem
to have ignited a market share war. Our long-standing
analysis shows a full-cycle, incentive-based normalised oil
price of around $60-$80/bbl. The impact of the projected
2020 market and likelihood that spare capacity is utilised
more than previously leads us to set 2024/25E at the low
end.
LatAm Oil & Gas 16 April 2020
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 48
YPF: Model update: Maintain Neutral rating;
lowering PT to US$5
As noted in our Stress test to our LatAm coverage report, lower oil prices have a
negative impact on YPF's investment case, raising concerns about the financial
feasibility of shale fields that have a break-even close to US$40/bbl. Among our
integrated coverage, YPF has the highest break-even, and we calculate it starts to
burn cash at the US$40/bbl level in 2020E.
UBSe oil price curve points to US$25/bbl in the 2Q20 and US$30/bbl in the 3Q20.
However, we became less concerned on the short-term as the government recently
decided to re-stablish the creole barrel (link), a reference price for crude oil
produced domestically, in order to avoid the paralysis in production. The price was
still not defined, but La Nacion news reported that it should be around US$40/bbl,
which is close to the company's breakeven level, but much more positive than the
current US$20-30/bbl.
Despite the positive impact in the upstream, we believe the downstream should
face pressures from the measure as it would buy crude at much lower levels.
However, now, the sector will buy oil at a higher rate. Also, the government
decided to implement taxes over fuels
Figure 63: PT: Old vs. new
11
PT old
9
Oil price
3
5
Capex
New PT
Source: UBS estimates
We see the creation of the creole barrel as a short-term positive impact for YPF as
it reliefs the upstream segment from the hefty decline in oil prices. We think of
US$45/bbl as a minimum level, as YPF (a benchmark in terms of costs in the
country) has a breakeven of around US$40/bbl. With an oil price reference of
US$45, some investments led by YPF could return to try to offset part of the fall of
the previous months.
However, as the history shows, the measure is very negative in the long term as it
creates an artificial prices leading to inefficiencies in the industry and skepticism
with capex spending from international companies. Therefore, the measure is not
sustainable in the long-term, in our view.
In addition, YPF's reserves face risks. In 2019, P1 decreased a slight 0.6%;
however, with oil prices at US$20-40/bbl, the amount could further decrease in
LatAm Oil & Gas 16 April 2020
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 49
2020. Also, on its 4Q19 conference call, YPF guided for adjusted EBITDA of
US$3bn, with capex of US$2.8bn, which we viewed as aggressive, especially as it
has US$1.6bn in short-term debt maturing in 2020 and a cash position of around
US$1.2b. Having that in mind, we see the company pressured in terms of liquidity,
with as the company should deliver have a lower EBITDA generation due to the
lower oil prices. That said, in our view, it will be crucial for YPF to reduce capex if
oil prices remain low. In our model, we are reducing our 2020E capex by 20%.
We are confident in the geological potential of Vaca Muerta, YPF's "buried
treasure" and our investment thesis on YPF foresees promising long-term
potential. However, we note that JVs formation is crucial to the area's
development, and even when the sector had a big appetite for investments due to
higher oil prices in 2018-19, YPF could not form JVs, as expected. Therefore, we
believe that for now, Vaca Muerta will remain buried.
Having in mind the difficult scenario in the short to mid-term, we foresee topdown and bottom-up challenges that could prevent the stock from reflecting the
full reserve potential due to the lack of visibility on when and under what
conditions the assets will provide returns. Therefore, we prefer to remain with a
conservative approach, maintaining our Neutral rating on the stock.
Figure 64: Financial estimates: Old vs. new
US$m (old)
Net Revenues
2019
2020
2021
2022
2023
2024
14,044
13,863
15,968
17,226
17,698
18,116
EBITDA
3,607
3,454
4,177
4,866
5,052
5,288
Net Income
-342
-139
154
536
672
827
US$m (new)
2019
2020
2021
2022
2023
2024
14,092
11,529
12,380
14,511
15,366
16,314
3,879
2,740
1,922
3,625
4,284
4,976
Net Income
-701
-135
-1,164
-179
420
904
Change (%)
Net Revenues
EBITDA
2019
2020
2021
2022
2023
2024
Net Revenues
0%
-17%
-22%
-16%
-13%
-10%
EBITDA
8%
-21%
-54%
-26%
-15%
-6%
-305%
-197%
-857%
-133%
-37%
9%
Net Income
Source: UBS estimates
Figure 65: Old WACC
Figure 66: New WACC
US$
US$
Risk Free
Country Risk premium
Mkt Premium
Beta
2.4%
9.72%
5.5%
1.2
Risk Free
Country Risk premium
Mkt Premium
Beta
2.4%
9.72%
6.0%
1.2
Ke (US$)
18.5%
Ke (US$)
19.0%
Equity/Total Capital
45.0%
Equity/Total Capital
45.0%
Debt/Total Capital
55.0%
Debt/Total Capital
55.0%
Tax Rate
Kd (US$)
WACC (US$)
Source: UBS estimates
LatAm Oil & Gas 16 April 2020
25%
7.6%
11.4%
Tax Rate
Kd (US$)
WACC (US$)
25%
7.6%
11.7%
Source: UBS estimates
fernando.siqueira@
infinityasset.com.br
 50
Figure 67: Old DCF
YPF DCF Summary
4Q19
2019
2020
2021
2022
2023
2024
2025
EBIT
416
243
850
1,065
1,487
1,555
1,716
1,763
NOPAT
291
170
637
798
1,115
1,166
1,287
1,322
DD&A
52
2,312
2,605
3,112
3,380
3,498
3,572
3,342
WC
(12)
(7)
(25)
(32)
(45)
(47)
(51)
(53)
CAPEX
(654)
(3,256)
(2,910)
(3,234)
(3,294)
(3,542)
(3,300)
(3,342)
FCFF (USD mn)
(323)
(782)
1,157
1,075
1,507
1,269
307
645
Perpetuity (USD mn)
15,507
DCF
(350)
298
564
907
756
951
9,505
Source: UBS estimates
Figure 68: New DCF
YPF DCF Summary
2020
2021
EBIT
(424)
NOPAT
(318)
DD&A
WC
CAPEX
FCFF (USD mn)
2022
2023
2024
2025
(1,367)
196
753
1,319
1,326
(1,025)
147
565
989
994
3,164
3,289
3,428
3,531
3,657
2,897
13
41
(6)
(23)
(40)
(40)
(2,094)
(2,583)
(2,625)
(3,068)
(2,840)
(2,897)
1,005
1,767
765
(278)
945
Perpetuity (USD mn)
DCF
954
11,312
765
(249)
757
721
1,135
7,057
Source: UBS estimates
Figure 69: Old equity bridge
g
Figure 70: New equity bridge
3.0%
g
3.0%
NAV USD mn
12,981
NAV USD mn
10,188
ND USD mn
(7,835)
ND USD mn
(7,696)
Minor @ BV
(659)
Minor @ BV
Mkt Cap USD mn
# ADR
Source: UBS estimates
4,486
393
Mkt Cap USD mn
# ADR
(519)
1,973
393
Source: UBS estimates
The perfect storm
YPF has been struggling since August 2019, after an unexpected result in the
Presidential primaries led ARS to depreciate c50% in one month. That resulted in a
90-day fuel price freeze in Argentina, which significantly hurt the company's
results and stock performance, as risk perception from investors rose because
Argentina had frozen oil and fuel prices two times in less than two years.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
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 51
Figure 71: YPF stock performance
20
18
16
14
12
10
8
6
4
2
0
Source: Reuters and UBS estimates
With the creation of the Creole barrel, we foresee less pressure on the upstream
segment, comparing to the current Brent price. Along with the implementation of
the domestic reference oil price, other measure approved was moveable
reductions, which according to La Nacion news, still hasn’t been defined, but is
known that it will start from a 0% tariff when international oil prices are below
US$30/bbl, differently from the current fixed rate of 12%. This variable collection
will serve as a "cushion" to soften the volatility of Brent prices in the domestic
market. We also see this as positive to protect the domestic market from the
uncertainty in the international oil prices.
On the downstream side, as aforementioned, we believe the segment might be
jeopardized by the creation of the Creole barrel, as it would buy crude at much
lower levels. However, now, the sector will buy oil at a higher rate. Also, the
government decided to implement taxes over fuels.
Currently, fuel tariffs increase is delayed by around 23%, and the government
stablished that it will be updated starting from April, without bringing an impact
into pump prices. The taxes will be updated quarterly, depending on the inflation.
This would lead to an increase of around 5-6% in gasoline and diesel, which will
be absorbed by refineries and will not be passed through.
The reason for this is that refiners will start to buy oil at a lower price QoQ, starting
from April. It should be lower than the US$47-52/bbl, of which oil was purchased
at to refining. This drop in the main input will translate into a decrease in the value
of the supplier, which in turn will be offset by the increase in taxes. Consequently,
one could argue that refiners' margins were frozen.
At the same time that margins will not see an increase, demand for fuels is
significantly lower due to the lockdown, with gasoline and diesel facing a decrease
of 10% and 30% below the previous average. La Nacion news reported that
refineries are working at the minimum necessary and that fuel storages are already
full.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 52
Figure 72: UBSe of YPF's fuel import parity
Source: Company reports, Reuters and UBS estimates
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 53
YPF (YPF.N)
Income statement (US$m)
Revenues
EBITDA (UBS)
DD&A and exploration
EBIT (UBS)
Assoc and other inc (UBS, pre-tax)
Net interest
Other pre-tax items
Profit before tax (UBS)
Tax (UBS)
Profit after tax (UBS)
Minorities
Other post-tax items
Net earnings (UBS)
Exceptionals/Extraordinaries
Net earnings (reported)
Tax rate (%)
% ch
-9.2
-22.6
12/16
14,233
1,465
(3,072)
(1,607)
40
(413)
0
(1,980)
77
(1,903)
10
0
(1,893)
0
(1,893)
0.0
12/17
15,260
4,045
(3,072)
973
83
(678)
131
509
217
725
(21)
0
705
0
705
-0.4
12/18
15,519
5,011
(3,337)
1,675
111
1,400
186
3,372
(2,109)
1,263
10
0
1,273
0
1,273
0.6
12/19E
14,092
3,879
(4,190)
(311)
159
79
90
17
(703)
(686)
(15)
0
(701)
0
(701)
42.1
12/16
(4.82)
(4.82)
(4.82)
0.16
0.00
19.02
393
12/17
1.79
1.79
1.79
0.10
0.00
20.80
393
12/18
3.24
3.24
3.24
0.11
0.00
24.29
393
12/19E
(1.78)
(1.78)
(1.78)
0.12
0.00
23.07
393
% ch
Balance sheet (US$m)
Cash and equivalents
Other current assets
Total current assets
Net tangible fixed assets
Net intangible fixed assets
Investments / other assets
Total assets
Trade payables & other ST liabilities
Short term debt
Total current liabilities
Long term debt
Other long term liabilities
Total liabilities
Common s/h equity
Minority interests
Total liabilities & equity
Total capital employed
Net (debt) cash
12/16
679
5,563
6,242
20,322
0
0
26,564
0
1,689
1,689
8,046
9,344
19,079
7,479
6
26,564
16,542
(9,057)
12/17
1,543
5,688
7,231
19,924
0
0
27,155
0
2,112
2,112
8,147
8,705
18,965
8,178
13
27,155
16,907
(8,716)
12/18
1,224
5,197
6,421
20,003
0
0
26,423
0
1,723
1,723
7,184
7,884
16,791
9,548
84
26,423
17,316
(7,684)
12/19E
1,104
4,518
5,622
19,635
0
0
25,257
0
1,789
1,789
7,011
7,295
16,094
9,070
93
25,257
16,858
(7,696)
% ch
Cash flow (US$m)
Net earnings (reported) pre MI
DD&A and exploration expensed
Net change in working capital
Other (operating)
Operating cash flow
Capital expenditure
Equity free cash flow
Net (acquisitions) & disposals
Dividends paid
Share issues / (buybacks)
Net other cash flows
Cash flow (inc)/dec in net debt
FX / non cash items
Dec / (inc) in net debt
12/16
(1,903)
3,081
(977)
3,246
3,447
(4,484)
(1,037)
0
(63)
0
1,893
793
0
793
12/17
725
3,284
(57)
474
4,426
(3,338)
1,088
0
(43)
0
(1,023)
22
0
22
12/18
1,263
3,094
(533)
1,136
4,960
(2,849)
2,111
0
(42)
0
(3,540)
(1,471)
0
(1,471)
12/19E
(686)
3,301
1,035
1,326
4,976
(3,407)
1,569
0
(48)
0
(2,323)
(802)
0
(802)
% ch
Per share (US$)
EPS (reported, diluted)
EPS (UBS, basic)
EPS (UBS, diluted)
Net DPS (US$)
Cash EPS (UBS, diluted)
Book value per share
Average shares (diluted)
-25.6
-
42.83
-94.4
-51.5
-99.5
66.7
-86.8
-
NM
15.1
-5.0
0.0
-9.7
-13.1
-12.4
-1.8
-
-4.4
3.8
3.8
-2.4
-7.5
-4.1
-5.0
10.5
-4.4
-2.6
-0.2
6.70
16.7
0.3
-19.6
-25.7
-15.0
34.4
45.5
-
45.5
12/20E
11,529
2,740
(3,164)
(424)
30
201
0
(193)
58
(135)
0
0
(135)
0
(135)
0.3
% ch
-18.2
-29.4
24.5
-36.2
-81.19
154.6
-
-
80.4
-
80.8
-
80.8
-99.3
12/20E
(0.34)
(0.34)
(0.34)
0.00
0.00
18.60
393
% ch
12/20E
1,669
5,263
6,932
15,119
0
0
22,052
0
1,467
1,467
6,502
6,693
14,662
7,314
76
22,052
13,690
(6,300)
% ch
12/20E
(135)
3,164
(924)
0
2,105
(2,094)
11
0
0
0
810
822
0
822
% ch
80.8
80.8
80.8
-19.4
0.0
51.2
16.5
23.3
-23.0
-
-12.7
-18.0
-18.0
-7.3
-8.3
-8.9
-19.4
-18.0
-12.7
-18.8
18.1
80.8
-4.15
-100.0
-57.7
38.6
-99.3
-
-
-
12/21E
12,380
1,922
(3,289)
(1,367)
31
(217)
0
(1,552)
388
(1,164)
0
0
(1,164)
0
(1,164)
0.3
12/22E
14,511
3,625
(3,428)
196
40
(474)
0
(238)
60
(179)
0
0
(179)
0
(179)
0.3
12/23E
15,366
4,284
(3,531)
753
51
(244)
0
560
(140)
420
0
0
420
0
420
0.3
12/21E
(2.96)
(2.96)
(2.96)
0.00
0.00
11.96
393
12/22E
(0.45)
(0.45)
(0.45)
0.00
0.00
11.55
393
12/23E
1.07
1.07
1.07
0.00
0.00
12.51
393
12/21E
871
4,851
5,721
11,238
0
0
16,959
0
1,152
1,152
5,373
5,673
12,198
4,702
60
16,959
10,415
(5,654)
12/22E
1,213
5,425
6,638
10,521
0
0
17,158
0
1,152
1,152
5,641
5,763
12,556
4,543
60
17,158
10,183
(5,581)
12/23E
1,380
5,663
7,043
10,108
0
0
17,151
0
1,152
1,152
5,211
5,810
12,173
4,918
60
17,151
9,960
(4,983)
12/21E
(1,164)
3,289
(336)
0
1,789
(2,583)
(794)
0
0
0
1,095
301
0
301
12/22E
(179)
3,428
(543)
0
2,707
(2,625)
82
0
0
0
219
301
0
301
12/23E
420
3,531
(213)
0
3,738
(3,068)
669
0
0
0
(1,151)
(482)
0
(482)
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 54
YPF (YPF.N)
Operational data
Production (000 boe/d)
12/16
578
12/17
555
12/18
530
12/19E
514
12/20E
514
12/21E
521
12/22E
531
12/23E
542
Valuation (x)
P/E (reported, diluted)
P/E (UBS, diluted)
P/CEPS (diluted)
Equity FCF (UBS) yield %
Net dividend yield %
P/BV
EV/EBITDA
EV/DACF
EV/EBIT
12/16
NM
NM
(14.7)
0.9
0.9
11.0
13.8
NM
12/17
12.5
12.5
12.4
0.5
1.1
4.3
4.6
18.0
12/18
5.6
5.6
29.5
0.6
0.7
3.0
3.2
8.9
12/19E
NM
NM
99.8
3.0
0.2
2.4
2.6
NM
12/20E
NM
NM
0.7
0.0
0.2
2.9
2.6
NM
12/21E
NM
NM
(50.5)
0.0
0.3
3.8
3.4
NM
12/22E
NM
NM
5.2
0.0
0.3
2.0
2.2
NM
12/23E
3.7
3.7
42.6
0.0
0.3
1.5
1.7
8.7
Debt adjusted cash flow (UBS)
Net earnings (reported) pre MI
DD&A and exploration expensed
Other non-cash items: Group
Other non-cash items: Associates
Post tax interest
Other
DACF (UBS)
12/16
(1,903)
3,072
0
0
0
0
1,169
12/17
725
3,072
0
0
0
0
3,798
12/18
1,263
3,337
0
0
0
0
4,600
12/19E
(686)
4,190
0
0
0
0
3,504
12/20E
(135)
3,164
0
0
0
0
3,029
12/21E
(1,164)
3,289
0
0
0
0
2,125
12/22E
(179)
3,428
0
0
0
0
3,250
12/23E
420
3,531
0
0
0
0
3,951
Enterprise value (US$m)
Market cap.
Net debt (cash)
Buy out of minorities
Pension provisions/other
Total enterprise value
Non core assets
Core enterprise value
12/16
7,051
9,057
0
0
16,108
0
16,108
12/17
8,778
8,716
0
0
17,494
0
17,494
12/18
7,155
7,684
0
0
14,838
0
14,838
12/19E
1,573
7,696
0
0
9,268
0
9,268
12/20E
1,573
6,300
0
0
7,872
0
7,872
12/21E
1,573
5,654
0
0
7,226
0
7,226
12/22E
1,573
5,581
0
0
7,153
0
7,153
12/23E
1,573
4,983
0
0
6,556
0
6,556
Growth (%)
Upstream volumes
EBITDA (UBS)
EBIT (UBS)
EPS (UBS, diluted)
Net DPS
12/16
0.2
(71.5)
6.1
12/17
(3.9)
176.1
(35.3)
12/18
(4.4)
23.9
72.2
80.6
1.9
12/19E
(3.1)
(22.6)
15.1
12/20E
0.1
(29.4)
(36.2)
80.8
-
12/21E
1.3
(29.8)
NM
NM
-
12/22E
1.8
88.5
84.7
-
12/23E
2.1
18.2
NM
-
Profitability (%)
ROACE (UBS)
ROE (UBS)
12/16
-5.8
0.0
12/17
3.2
0.0
12/18
4.4
0.0
12/19E
-1.3
0.0
12/20E
-1.7
0.0
12/21E
-6.9
0.0
12/22E
1.0
0.0
12/23E
3.8
0.0
Capital structure & Coverage (x)
Net debt / EBITDA
Net debt / total equity %
Net debt / (net debt + total equity) %
Net debt/EV %
Capex / depreciation %
CAPEX / operating cashflow %
EBIT / net interest
Dividend cover (UBS)
Div. payout ratio (UBS) %
12/16
6.2
0.0
0.0
0.6
145.5
130.1
NM
NM
NM
12/17
2.2
0.0
0.0
0.5
101.6
75.4
1.4
17.3
5.8
12/18
1.5
0.0
0.0
0.5
92.1
57.4
NM
NM
3.3
12/19E
2.0
0.0
0.0
0.8
103.2
68.5
3.9
NM
NM
12/20E
2.3
0.0
0.0
0.8
66.2
99.5
2.1
0.0
12/21E
2.9
0.0
0.0
0.8
78.5
144.4
NM
0.0
12/22E
1.5
0.0
0.0
0.8
76.6
97.0
0.4
0.0
12/23E
1.2
0.0
0.0
0.8
86.9
82.1
3.1
0.0
12/16
(1,334)
(434)
161
(1,607)
12/17
710
331
(68)
973
12/18
921
804
(50)
1,675
12/19E
(171)
(149)
9
(311)
12/20E
(233)
(203)
13
(424)
12/21E
(861)
(533)
27
(1,367)
12/22E
124
77
(4)
196
12/23E
475
294
(15)
753
EBIT (UBS) by division (US$m)
Upstream
Downstream
Other
Total
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.
LatAm Oil & Gas 16 April 2020
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 55
Valuation Method and Risk Statement
Risks for oil companies 1) commodity price and domestic refinery gate prices for
gasoline/diesel; 2) exploration risks associated with the business; 3) worse-thanexpected drilling results; and 4) a steep increase in market risk aversion.
Risks for fuel distribution companies: 1) lower volume growth due to weaker
economic activity; 2) a slower pace on regulatory changes; and 3) other business
headwinds, such as sugar, ethanol and MEG prices.
Petrochemical companies: 1) lower global petrochemical spreads; 2) lower volume
growth; and 3) FX rate volatility.
Petrobras: Our multiple/SOTP-based valuation gives us a PT for PETR4 (PN) and
another for PETR3 (ON) based on the dividend differential between the classes.
The following are key risks to Petrobras' share price: 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) price revaluation of the 5bn barrel rights recently
purchased from the parent; and 5) outlook for Brazilian politics and economics and
changes to Brazil's energy legislation.
Ecopetrol: Our PT is a result of DCF based on UBS's Brent price forecast of
US$60/bbl over the long term.
The following are key risks to Ecopetrol's share price: 1) commodity prices and
domestic refinery gate prices for gasoline/diesel; 2) exploration risks associated
with the business; 3) worse-than-expected drilling results; and 4) a steep increase
in market risk aversion.
Canacol: Our PT is a result of DCF, based on UBS's Brent price forecast of
US$60/bbl over the long term.
The following are key risks to Canacol's share price: 1) commodity prices; 2)
exploration risks associated with the business; 3) worse-than-expected drilling
results; and 4) a steep increase in market risk aversion.
YPF: Our PT is a result of a DCF based on UBS's Brent price of US$60/bbl in the
long term.
The following are key risks to YPF share price: 1) commodity price and domestic
refinery gate prices for gasoline/diesel; 2) exploration risks associated with the
business; 3) Instability of the Argentinian economy.
Enauta: We calculate a multiples/SOTP-based for Enauta. Our PT is based on UBS's
Brent price of US$60/bbl in the long term.
The following are key risks to Enauta share price: 1) commodity price; 2)
exploration risks associated with the business; 3) outlook for the Brazilian politics
and economics and changes to Brazil’s energy legislation.
LatAm Oil & Gas 16 April 2020
fernando.siqueira@
infinityasset.com.br
 56
Required Disclosures
This report has been prepared by UBS Brasil CCTVM S.A., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and
affiliates are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical
performance information; and certain additional disclosures concerning UBS research recommendations, please visit
www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable
indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed
to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act
as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was
finalized on: 16 April 2020 11:12 AM GMT. UBS has designated certain Research department members as Derivatives
Research Analysts where those department members publish research principally on the analysis of the price or market for a
derivative, and provide information reasonably sufficient upon which to base a decision to enter into a derivatives
transaction. Where Derivatives Research Analysts co-author research reports with Equity Research Analysts or Economists,
the Derivatives Research Analyst is responsible for the derivatives investment views, forecasts, and/or recommendations.
Analyst Certification:Each research analyst primarily responsible for the content of this research report, in whole or in part,
certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed
accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner,
including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by that research analyst in the research report.
UBS Investment Research: Global Equity Rating Definitions
12-Month Rating
Definition
Coverage1
IB Services2
Buy
FSR is > 6% above the MRA.
48%
32%
Neutral
FSR is between -6% and 6% of the MRA.
40%
28%
Sell
FSR is > 6% below the MRA.
13%
20%
Short-Term Rating
Definition
Coverage3
IB Services4
Buy
Stock price expected to rise within three months from the time
the rating was assigned because of a specific catalyst or event.
<1%
<1%
Sell
Stock price expected to fall within three months from the time
the rating was assigned because of a specific catalyst or event.
<1%
<1%
Source: UBS. Rating allocations are as of 31 March 2020.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided
within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided
within the past 12 months.
KEY DEFINITIONS:Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend
yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption
(MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk
premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or
rating are subject to possible change in the near term, usually in response to an event that may affect the investment case
or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not
reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12
months.
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EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and definitions are: Buy: Positive on
factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure,
management, performance record, discount; Sell: Negative on factors such as structure, management, performance record,
discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment
Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective
company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they
relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant
research piece.
Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not
registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and
therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and
trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate
contributing to this report, if any, follows.
UBS Brasil CCTVM S.A.: Luiz Carvalho; Gabriel Barra.
Company Disclosures
Company Name
Reuters
12-month rating
Short-term rating
Price
Price date
Canacol Energy Ltd20a
CNE.TO
Buy (CBE)
N/A
C$3.61
15 Apr 2020
EC.N
Neutral (CBE)
N/A
US$10.71
15 Apr 2020
Enauta20a
ENAT3.SA
Neutral (CBE)
N/A
R$10.00
15 Apr 2020
Petrobras (ON)2, 4, 16, 20a
PETR3.SA
Buy (CBE)
N/A
R$16.62
15 Apr 2020
Petrobras (PN)2, 4, 16, 20a
PETR4.SA
Buy (CBE)
N/A
R$16.38
15 Apr 2020
Petrobras Distribuidora SA
BRDT3.SA
Buy
N/A
R$19.49
15 Apr 2020
YPF.N
Neutral (CBE)
N/A
US$3.96
15 Apr 2020
Ecopetrol SA16, 20a
YPF16, 20b
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock
pricing date
2.
UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of
securities of this company/entity or one of its affiliates within the past 12 months.
4.
Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking
services from this company/entity or one of its affiliates.
16.
UBS Securities LLC makes a market in the securities and/or ADRs of this company.
20a.
Because this security exhibits higher-than-average volatility, the FSR has been set at 15% above the MRA for a Buy
rating, and at -15% below the MRA for a Sell rating (compared with 6/-6% under the normal rating system).
20b.
Because this security exhibits higher-than-average volatility, the FSR has been set at 25% above the MRA for a Buy
rating, and at -25% below the MRA for a Sell rating (compared with 6/-6% under the normal rating system).
Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set
of disclosure statements associated with the companies discussed in this report, including information on valuation and risk,
please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research.
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 59
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