Petrobras Deepens Cost Cuts to Counter Brazil Fuel Subsidies

May 12, 2014 9:14 am ET

(Updates with shares in fifth paragraph.)

May 12 (Bloomberg) -- Petroleo Brasileiro SA is stepping up cost-cutting measures to avoid a fourth straight profit decline amid losses derived from government fuel subsidies.

Petrobras, as Brazil’s state-run oil producer is known, raised a 2013-2016 cost-saving target to 37.5 billion reais ($16.9 billion) from 32 billion reais, the Rio de Janeiro-based company said in a May 9 statement accompanying first-quarter results, which included a 30 percent drop in net income.

Chief Executive Officer Maria das Gracas Foster is attempting to counter operational losses at the company’s refining and distribution unit of about $40 billion since 2011 when President Dilma Rousseff started using Petrobras to subsidize fuel imports to rein in inflation. Foster has sought to close the gap between domestic and foreign prices, while cutting operating expenses and increasing production.

“The company has the ability to recover profitability and its market value over the course of 2014, mainly through efficiency gains and increasing operational capacity,” Nataniel Cezimbra, an analyst at Banco do Brasil SA, said in a research report after the results were released.

Petrobras rose 1.5 percent to 17.93 reais at 10:13 a.m. in Sao Paulo. The stock lost 13 percent in the past year before today, the worst performance among 15 global peers tracked by Bloomberg, which had an average gain of 15 percent. Trading at 8.57 times estimated earnings, Petrobras is the group’s cheapest stock.

First-quarter net income declined to 5.39 billion reais ($2.28 billion), or 41 centavos a share, from 7.69 billion reais, or 59 centavos, a year earlier. The average per-share estimate of 13 analysts tracked by Bloomberg was 42 centavos.

Fuel imports rose 13 percent from a year earlier, generating a first-quarter loss for the refining unit of 7.4 billion reais. Profit at its gas unit slumped 41 percent.

Price caps require imported gasoline and diesel to be sold at a loss to domestic distributors. President Rousseff is seeking to keep prices in check ahead of October elections. Increases of 4 percent for gasoline and 8 percent for diesel that took effect Dec. 2 were the first in nine months.

Adjustments Sought

Petrobras’s cash flow will improve after it starts a new refinery later this year, Foster said in the statement. The company will also “gradually” adjust domestic prices to international benchmarks, she said.

“It will be very difficult to have an adjustment in an election year,” Luana Helsinger, an oil and gas analyst at brokerage GBM Brasil, who has the equivalent of a buy rating on the stock, said by telephone from Rio.

Petrobras, the only gasoline and diesel producer in Brazil, ran its 11 crude refineries at an average 96 percent of capacity during the quarter in an attempt to lower reliance on imports. The over-stretching of workers and machinery was one of the reasons behind fires at two plants in December and January, according to the country’s oil workers union.

Petrobras said May 5 that it expects 13 billion reais in savings through 2018 with a voluntary dismissal program.

Most Debt

Petrobras’s debt of more than $100 billion is the highest of any publicly traded oil company, data compiled by Bloomberg show. That compares with about $82 billion at PetroChina Co. and about $66 billion at Russia’s OAO Rosneft, the two most indebted crude producers after Petrobras.

A fourfold increase in the obligations in five years prompted Moody’s Investors Service to cut its rating on Petrobras’s debt by one level last year to Baa1, the third- lowest investment grade.

Pre-salt Target

The company is investing $221 billion in the five years through 2018 as it develops deposits trapped beneath a salt layer miles below the Atlantic Ocean’s floor in deep waters off Brazil’s southeastern coast.

Given the financial needs to develop the so-called pre-salt reserves, borrowing costs will remain at record levels, said Carlos Gribel, vice president for emerging markets at INTL FCStone Securities in Miami.

Higher debt is coupled with the company’s expectation that it won’t generate positive net cash flow this year. Petrobras has posted about $40 billion in operational losses at its refining and distribution unit since it started subsidizing fuel imports in 2011.

“Based on the decisions of the Brazilian federal government, as our controlling shareholder, we have, and may continue to have, periods during which our product prices will not be at parity with international product prices,” The company said in an April 30 regulatory filing.

Policy Outlook

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 almost flat since 2010.

“It’s not like they’re still wildcatting, trying to find the resource, they just need to bring that online,” Chris Kettenmann, an analyst at Prime Executions Inc., said in a telephone interview from New York. “The policy situation in my mind can only improve. How much worse can it really get?”