Petroleo Brasileiro SA (PETR4) is losing a record $8 billion at its refining unit this year as Brazilian President Dilma Rousseff’s battle with inflation means the state-run company must sell imported gasoline below cost.
Lacking refining capacity to meet demand, Petrobras increased gasoline imports 65 percent to 84,000 barrels a day in the third quarter, according to earnings statements. The imports, which the company sells at about 8 percent less than cost, caused year-to-date losses at its refining division to widen to 17.3 billion reais ($8.4 billion) from 10 billion reais for the whole of 2011.
Rousseff is preventing Petrobras from raising fuel prices as inflation has exceeded Brazil’s 4.5 percent target since September 2010. The subsidy will erase $4 billion to $6 billion in revenue next year unless Petrobras is allowed to sell imports at cost, according to Bank of America Corp.
“Demand is high, the economy is going up again and we don’t have the capacity to supply the market,” said Lucas Brendler, who helps manage about 6 billion reais at Banco Geracao Futuro de Investimentos, including Petrobras shares. “You still don’t have any surplus in refining capacity in Brazil, so Petrobras is still going to import these products.”
Petrobras, based in Rio de Janeiro, fell 11 percent this year before today, the worst performer of the world’s top six oil companies by market value. The stock has also underperformed the benchmark Bovespa index, which dropped 0.5 percent. It’s trading at 8.25 times earnings estimates for the next four quarters compared with the 9.27 average ratio among global peers, data compiled by Bloomberg show. It declined 0.5 percent to 19.03 reais at 3:21 p.m. in Sao Paulo.
The oil producer may have to sell more assets or curb investment if its government-run board doesn’t raise prices for fuel sold to distributors, Chief Financial Officer Almir Barbassa told reporters in New York on Nov. 15.
“Prices in 2011 and 2012 were below what we think they should be,” Barbassa said. “But we don’t have any projections about the adjustment.”
The government controls the company through a majority voting stake. Petrobras plans to generate $14.8 billion from the sale and restructuring of assets, according to its 2012-2016 business plan.
Refining output in Brazil, which was self-sufficient in crude and gasoline until 2009, hasn’t kept up with surging consumption as Petrobras, the only domestic refiner, faces delays and cost overruns at its biggest projects. Demand is growing four times faster than the economy as consumers who are getting access to credit for the first time buy cars.
Brazil, the world’s largest emerging economy after China, will expand 4 percent next year after an estimated 1.5 percent in 2012, according to a central bank survey of economists.
Since taking office in February, Chief Executive Officer Maria das Gracas Foster started a program to cut costs, improve efficiency and increase production. She replaced the head of refining, Paulo Costa, with Jose Consenza and boosted fuel output to a record in the third quarter.
Petrobras is generating enough cash to cover investments with current oil prices and the local exchange rate and doesn’t have a timeframe for an increase in domestic fuel prices, Foster told reporters in Brasilia today. While the company expects to raise prices eventually, it won’t need to if crude prices fall like they did in 2009, she said.
Petrobras was last allowed to raise prices for gasoline by 7.8 percent in June. It boosted diesel prices by 3.9 percent in June and by another 6 percent in July. The government simultaneously cut a tax on fuels to reduce the impact of the increases on inflation.
The company is carrying out its $236.5 billion five-year investment program as planned, the company said in an e-mailed response to questions, declining to comment further.
Brazilian fuel prices have been lower than those in the U.S. Gulf of Mexico since the start of 2011, when Petrobras’s refining division started posting losses, according to company presentations.
By comparison, Colombia’s state-run Ecopetrol SA (ECOPETL) adjusts gasoline prices monthly according to international oil prices and transportation costs. Venezuela’s state-owned Petroleos de Venezuela SA sells the cheapest gasoline of all countries in the Organization of Petroleum Exporting Countries because of subsidies.
Bank of America Corp. cut its recommendation for Petrobras to the equivalent of hold from buy in a Nov. 12 report mainly because of the persistent discount in fuel prices. Earnings for 2012 could have been at least 35 percent to 40 percent higher if Petrobras sold at international prices, analysts Frank McGann and Conrado Vegner said in the report.
It will take three to five years for Petrobras to build enough refineries to reduce imports and make the division profitable, Erick Scott Hood, an analyst at Sao Paulo-based brokerage SLW Corretora, said in a telephone interview.
The company is adding four refineries in Brazil. Its imports will peak in 2014 and start declining after it starts the Abreu e Lima refinery in northeastern Brazil, refining chief Consenza said at a conference in Rio on Oct. 9.
Petrobras’s plan to build enough refineries to supply the local market and export surpluses is a good long-term strategy if the company can build facilities that are as efficient as those in other countries, Carmine Difiglio, deputy assistant secretary at the U.S. Department of Energy, said in an interview in Rio on Oct. 9.
“Brazil’s energy policies have been far sighted,” Difiglio said. “Brazil was greatly criticized in the 1980s for its biofuels policies, which turned out to be a great success.”
Petrobras’s management probably is pushing for a price increase this year and another in 2013, while Rousseff’s economic team will seek to delay the impact on consumer prices, Christopher Garman, director for Latin America at political risk consulting firm Eurasia Group, said by phone from Washington. He expects the company will win an increase of 6 to 8 percent.
“Is that enough to stop the hemorrhaging?,” Garman said. “Probably not. I think they’re going to slow the bleeding.”
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