Petrobras’s Worsening Energy Trade Leads to Surprise Profit Drop

Aug 08, 2014 11:00 pm ET

Aug. 9 (Bloomberg) -- Petroleo Brasileiro SA, the biggest oil producer in deep waters, posted an unexpected profit decline in the second quarter after its fuel imports surged and crude exports fell.

Net income fell 20 percent to 4.96 billion reais ($2.2 billion), or 0.38 reais a share, from 6.2 billion reais, or 48 centavos, a year earlier, the Rio de Janeiro-based company said yesterday in a statement. That trailed the 55-centavo average of 12 analysts’ estimates compiled by Bloomberg, making this the third time in four quarters that Petrobras missed forecasts.

Rising Brazilian demand for gasoline and diesel that Petrobras sells at a discount relative to international prices is leading the state-run producer to export less crude and increase refinery output. It cut sales to overseas markets by 14 percent from a year earlier, while the refining boost wasn’t enough to prevent a 56 percent surge in fuel imports.

The government, which controls Petrobras with a majority of voting shares, has prevented the company from increasing prices enough to erase import losses as it seeks to keep inflation in check.

The company’s fuel imports jumped to 407,000 barrels a day in the quarter, from 261,000 a year earlier. Daily crude exports fell to 308,000 barrels from 359,000.

“Brazil’s domestic pricing for gasoline and diesel, which has ranged between 10 percent and 20 percent below international pricing, depending on the exchange rate, puts a significant drag on Petrobras’s profitability,” Moody’s Investors Service said in a July 29 research report.

Shares Suffer

The fuel subsidy policies have weighed on the shares, which have lost investors 37 percent in the past four years, making it the worst performer of the 20 most valuable major oil producers, according to data compiled by Bloomberg.

“We are seeking convergence with international fuel prices in Brazil” to help meet the company’s internal financial targets, Chief Executive Officer Maria das Gracas Foster wrote in the earnings report. “I reassure investors and stockholders that the increasing production of oil, natural gas and derivatives, specially diesel and gasoline, is already a reality on a daily basis.”

The government probably won’t authorize a fuel price increase before elections in October, Eurasia Group said in a Aug. 6 note to clients.

More Spending

“The company will continue to spend cash and raise substantial amounts of debt through the end of 2015, until pre- salt production begins to generate significant cash flow in 2016-2017,” Moody’s said, referring to the deep-water reserves comprising the company’s largest discoveries.

Petrobras plans to boost domestic crude output 7.5 percent this year as it connects wells to production equipment in deep waters of the Atlantic. A combination of equipment delivery delays, unplanned maintenance at offshore platforms and faster- than-expected declines at the company’s legacy fields in the Campos Basin has left production nearly flat since 2010.

Analysts from Banco Santander SA and Banco Bradesco SA have warned that the slower-than-forecast expansion so far is putting this year’s goal at risk even though new wells and production vessels are expected to accelerate growth in the second half.

Investors aren’t counting on Petrobras meeting its targets this year, Eric Conrads, who helps oversee $500 million in Latin American stocks as a money manager at ING Groep NV, said. The stock has gained 13 percent this year on speculation the presidential elections in October will herald more investor- friendly policies.