Petrobras Respite Fueled by Rousseff Downfall: Corporate Brazil

May 13, 2014 4:43 pm ET

(To set an alert for Corporate Brazil: SALT BZCORP)

May 13 (Bloomberg) -- Petroleo Brasileiro SA is enduring a congressional probe into a $1.2 billion refinery purchase, and a former director is in jail for alleged money laundering. For shareholders, that’s good news.

The stock is posting the best two-month rally among major crude producers as investors bet the bad publicity will hurt Brazilian President Dilma Rousseff’s chances of getting re- elected in October. The state-run company has lost $40 billion because of fuel-price caps since Rousseff took office.

Petrobras, as the crude producer that lost 70 percent of its value in six years is known, has been rebounding since the middle of March. It will rally further should the next elected government scrap price limits on the gasoline and diesel that Petrobras imports and sells for a loss to meet local demand, according to ING Investment Management.

“The stock is clearly a play on the elections,” said Eric Conrads, a money manager who helps oversee $500 million in Latin American stocks, including Petrobras, at ING Groep NV.

Petrobras’s 43 percent rally since March 17 is the biggest increase among the world’s largest oil companies by market value, data compiled by Bloomberg show. The stock fell 0.4 percent to 17.96 reais at the close in Sao Paulo.

Lula Comeback

Rousseff’s support rating, which is also getting hit by concerns over faster inflation and World Cup spending, fell to 37 percent from 44 percent in less than three months, a survey by Datafolha published May 9 showed. Her slumping popularity stoked speculation that former President Luiz Inacio Lula da Silva, who let Petrobras profit from imported fuel sales, may run in her place.

Lula on May 3 vowed to help Rousseff campaign, saying he will be on “Dilma’s side in this election.”

Even if Rousseff wins re-election, she’s likely to ease price controls that are sapping profit at Petrobras as part of a wider strategy to accelerate economic growth, said James Gulbrandsen, a Rio de Janeiro-based partner and chief investment officer at NCH Brazil, a division of NCH Capital Inc.

“If Dilma is re-elected, it will be a completely different four years,” Gulbrandsen said by phone.

The company has booked about $40 billion of operating losses stemming from the fuel policy that Rousseff has used in a bid to keep inflation in check since the start of her government in 2011.

Profit Slump

First-quarter net income declined to 5.39 billion reais ($2.28 billion) from 7.69 billion reais a year earlier as fuel imports rose 13 percent, generating a loss for the refining unit of 7.4 billion reais. Profit at the gas unit slumped 41 percent.

Chief Executive Officer Maria das Gracas Foster is attempting to counter operating losses at the fuel unit by stepping up domestic production. She expects her efforts will help the stock rebound further.

“In very little time we will have recovered our real market value,” Foster told journalists in Rio yesterday. The current share price isn’t “close to the value of the company. We’re growing and more confident every day.”

The money-losing fuel unit has come under growing scrutiny from inside and outside the company.

Lawmakers have grilled Foster over the $1.2 billion purchase of a refinery in Texas. The company started an internal probe into the Abreu e Lima refinery in northeastern Brazil where costs have risen to more than seven times the original budget. And the company’s former refining head is in jail after being accused of involvement in money laundering.

More Transparency

“The increased scrutiny specifically over the downstream business arm of the company, pricing policy, refinery plans and investment is good because it will increase transparency for the market,” Chris Kettenmann, an analyst at Prime Executions Inc. who started recommending the stock about the time New York- traded shares fell to $12 in January, said in a telephone interview. The American depositary receipts rose 1.7 percent yesterday to close at $15.36.

Not all believe this year’s election will bring change to Petrobras. Rousseff still leads in opinion polls and is unlikely to re-invent herself as a reformer in a second term, said Russ Dallen, head trader at Miami-based Caracas Capital Markets.

“The election is hers to lose,” Dallen said in a telephone interview. “I don’t see any policy moderation from Dilma if she’s re-elected.”

Most Debt

The world’s most indebted publicly traded oil company is investing more than $100 million a day on average in an effort to double domestic crude output to 4.2 million barrels a day in 2020.

The state of Rio, which relies heavily on Petrobras for tax revenue, also expects a policy change after elections.

“The fuel price policy won’t survive beyond October,” Julio Bueno, a former head of Petrobras’s distribution unit who’s now the state’s economy secretary, said in an interview at Bloomberg’s Rio office. “Petrobras is subject to an unbelievably wrong price policy.”

--With assistance from Rodrigo Orihuela in Rio de Janeiro.