Can Petrobras (PBR) Turn It Around This Earnings Season?

Brazilian state-run energy giant Petroleo Brasileiro S.A. or Petrobras PBR is expected to release its fourth-quarter 2014 results on Tuesday, Feb 24.

In the preceding three-month period, Petrobras delivered a negative 32.14% earnings surprise – the third underperformance in a row – hampered by lower crude price realization.

Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Petrobras is likely to beat earnings because it has the perfect combination of two key ingredients.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +57.14%. This is because the Most Accurate estimate stands at 44 cents, whereas the Zacks Consensus Estimate is pegged lower at 28 cents. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: Petrobras currently has a Zacks Rank #3 (Hold). Note that stocks with Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Petrobras' Zacks Rank #3 and +57.14% ESP makes us reasonably confident of an earnings beat at the company.

What is Driving the Better-than-Expected Earnings?

We believe that continued demand growth in Brazil (expected to outperform developed countries in the next few years), together with all the new investments and acquisitions, will fuel Petrobras' medium-term earnings outlook. Additionally, we expect the company to benefit from its expertise in deep-water operations, its huge recent discoveries (which could double its resource base) and the growing domestic refined products market.

The recent increase in fuel prices (announced in November) should also benefit Petrobras. The move would not only boost the state-run energy major's margins but also cut its import losses.

Other Stocks to Consider

Petrobras is not the only company looking up this earnings season. Here are some other companies to consider as our model shows they also have the right combination of elements to post an earnings beat this quarter:

Holly Energy Partners L.P HEP has an Earnings ESP of +7.90% and a Zacks Rank #2 (Buy). The partnership is likely to release earnings on Feb 24.

Global Partners L.P. GLP has an Earnings ESP of +75.00% and a Zacks Rank #2. The partnership is expected to release earnings on Mar 12.

Ferrellgas Partners L.P. FGP has an Earnings ESP of +1.82% and a Zacks Rank #3. The partnership is slated to release earnings on Mar 9.