Credit Update: Petrobras’ 5+/6+% USD bonds are still compelling

We last covered Petrobras back in late April 2026: Credit Update: Attractive USD yields of 5-6% offered by Iran conflict beneficiary-Petrobras

Petrobras just released its second-quarter results for the period ending 30 June 2026 (2Q2026). In this article, we examine the group’s latest earnings, assess the credit profile, and refresh our recommendations.

1. Higher Brent oil prices flow through to the bottom line

• For 2Q2026, revenue rose 59.8% YoY to US$33.6b, while adjusted EBITDA doubled to US$18.6b with adjusted EBITDA margins expanding to 55% from 44% a year prior. This led to net income soaring 162% YoY to S$10.4b. Operating cash flow (OCF) came in at US$12.3b (+63.3% YoY), while total capital expenditure (capex) was US$5.3b (+3.8% YoY). Consequently, free cash flow was lifted to US$7.7b (+123.5% YoY).

• The main driver of this quarter is the oil price environment we flagged in our last update. Average Brent prices came in at US$104.5/bbl, up from US$80.61/bbl for 1Q2026 and US$67.8/bbl for 2Q2025.

• Looking ahead, we do not treat this quarter as a new baseline. Brent prices have retreated to roughly US$80+/bbl at the time of writing due to de-escalation in the Middle East conflict. Therefore, we expect Petrobras’ financial performance (adjusted EBITDA, cash flows) to moderate for the subsequent quarters. As flagged previously, we still believe that the crux of Petrobras’ credit case continues to be underpinned by its lower operating costs and ability to increase its production volumes.

2. Operational efficiency continues to improve, with more barrels at lower underlying cost

• Total production for the quarter reached a record 3.34 Mboed in 2Q2026, up 14.1% YoY and 3.4% from 1Q2026. This was due to the start-up of FPSO units ahead of their planned timeline, which tracks with the FPSO ramp-up we have highlighted since our initiation coverage on Petrobras.

• On the structural side of per-barrel cost, we are encouraged by the continued improvement seen in unit economics. Base lifting cost (excluding government take and leases) came in at US$6.33/boe, below FY2025’s average of US$6.36/boe. We highlight that this was achieved despite an appreciation of the Brazilian Real (BRL) against the USD. The main drivers were higher pre-salt volumes (from the FPSO ramp-up), fewer maintenance-related losses, and more efficient new producing wells. Pre-salt, which accounts for 83% of the production mix, had lifting costs of just US$4.45/boe.

• On the cyclical side, the double-edged sword we noted has materialised. All-in lifting cost, including production taxes and leases, rose to US$26.56/boe (FY2025: US$20.65/boe) as production taxes and leases rose due to the mechanical link between Brent oil prices and Brazil’s special participation levies.

• Looking ahead, we think the structural trend has further room to run. Three new FPSOs are due to come online through 2027, followed by another in 2028, which should lift the pre-salt share beyond today’s 83% and continue diluting base unit costs. More importantly for bondholders, we highlight that all-in lifting cost could flatten or increase due to government takes moving with Brent oil prices rather than a deterioration in operating efficiency; base lifting cost is what management controls.

3. Debt profile improves, with financial debt actively reduced while coverage remains ample

• Net debt (including leases) edged down to US$60.4b (31 December 2025: US$60.6b). More meaningfully, financial debt (bank loans and bonds) fell to US$25.8b from US$26.4b as Petrobras actively worked down its financial debt; a clear positive for bondholders. Consistent with our coverage, the main contributor to Petrobras’ debt sits in lease accounting. Finance leases are at US$45.0b, representing 64% of gross debt, reflecting newly commissioned FPSOs recorded as long-term lease commitments under accounting rules. We remain comfortable with this figure as these leases are backed by productive, revenue-generating assets.

• Liquidity is ample with US$10.4b in cash and equivalents against short-term financial (maturing in a year) of US$1.4b; as such, we do not expect any near-term refinancing risk. Petrobras' healthy generation of cash flows (even after normalisation) further substantiates its liquidity profile. Leverage metrics continue to trend down, with net debt/EBITDA improving to 1.1x from 1.4x (31 December 2025), while coverage (TTM EBITDA / TTM finance expense) remains ample at 12.3x.

• Looking forward, we think that even after oil prices normalise, Petrobras' credit profile remains decent, and we are still comfortable with its leverage and coverage metrics. On cash flows, OCF is expected to continue trending higher as the FPSO fleet reaches full utilisation. FCF should moderate from the strong US$7.7b posted this quarter as prices retrace, but we think the group retains sufficient headroom to fund its investment cycle and service its debt.

4. Fuel subsidies and export taxes now carry measurable effects

• Both Brazilian government subsidies on domestic gas, and export taxes, have increased since our last update. Subsidy-related receivables now stand at US$2.1b; Petrobras funds these consumer price interventions upfront and recovers the cost from the Federal Government afterwards, turning export-linked revenue into a claim on the sovereign. Separately, the 12% crude oil and 50% diesel export taxes produced a US$965m charge in 2Q26 (1H26: US$1.1b). While these figures are not significant compared to Petrobras’ overall revenues, we think these factors represent the government risk involved in the national oil producer.

• Looking ahead, we expect national intervention to persist through Brazil’s October 2026 general election, and we would not be surprised to see the subsidy programme extended rather than wound down. For bondholders, it is vital to keep track of the government actions as the next intervention / regulatory change could present materially impact Petrobras’ operations and financials.

Recommendation

• We maintain our constructive view on Petrobras’ credit profile, which has modestly improved. The group generated record cash, used it to pay down its financial debt, and extended its maturity profile. Base lifting costs continue to improve, which should provide a more durable benefit against oil price fluctuations. While the role and policies of the Brazilian government remain an ever-present credit watch, we expect Petrobras to maintain its decent credit profile moving forward.

• We continue to find value in Petrobras’ USD bonds as highlighted in Table 1 below. These bonds offer yields-to-worst ranging from 5.57% to 6.14%, with intermediate tenors of 4+ to 8+ years. We highlight the 2030 and 2033 issues; the former offers a decent spread of 148bps against comparable sovereigns for investors looking for a shorter tenor issue, while the latter offers the widest spread (193bps) for investors looking for attractive income on an intermediate timeframe.

Table 1: Petrobras USD bonds