Goldman Sachs: Petrobras would remain profitable with the new pricing policy

By Monique Lima

What would happen if Petrobras changed its pricing policy?

The shareholders’ meeting to approve the company’s new board of directors is scheduled for April 27.

The federal government eagerly awaits the date.

Since the election campaign, President Luiz Inácio Lula da Silva made it clear that he intended to change the pricing practices of the state-owned company.

Recently, Lula reiterated this intention:

“We will change but with criteria.”

“During the campaign, I said that it was necessary to make the price of gasoline and diesel more transparent.”

“Brazil has no reason to be submitted to international prices”, he stated in a conversation with journalists.

According to the Minister of Mines and Energy, Alexandre Silveira, the new policy would entail “internal competitive prices”.

A change that the state-owned company stated, via a relevant fact, that is neither underway nor being discussed at the moment.

However, analysts believe this may change with the new board of directors.

What would be the market’s reaction?

Forbes Brasil had access to a report from the American investment bank Goldman Sachs which outlines different scenarios for the oil company with the possible change in its pricing policy.

PETROBRAS VS. PROFITS

The first and most important highlight is that the company would hardly cease to be profitable.

For analysts, the company’s profitability may be harmed.

However, suppose the difference between the price of crude oil and extracted oil products, known as the global spread, is normalized.

In that case, they still see the company delivering positive free cash flow (FCF) and operating profit per barrel (Ebitda/bbl).

This will occur even if Petrobras abandons its current Import Price Parity (IPP) methodology.

Adopted in 2016, the IPP considers the cost at the international port from which the oil would be imported, plus transportation and inbound expenses, such as port and transportation expenses to the distribution bases.

The Export Price Parity (EPP), on the other hand, is the inverse.

It considers what would be gained by exporting the oil, considering the export value in a Brazilian port, and assuming the option to export goods instead of consuming them domestically.

However, although Petrobras remains profitable, its valuation gets tighter, and the interest of international investors could diminish.

“If export parity prevails and spreads converge to the historical average in diesel and gasoline (US$14 and US$7, respectively), the cash flow yield would converge to the mid-14% between 2024 and 2025,” the analysts say.

“Investors seek a minimum cash flow yield of 15% for emerging market oil stocks, as developed markets offer 11% on average.”

“[They] demand a higher premium from emerging markets due to higher risk and volatility,” write Bruno Amorim, João Frizo, and Guilherme Costa Martins.

The analysts also expose a second situation. If the pricing policy changes to export parity, but spreads remain at the current level (US$30 a barrel for diesel and US$18 a barrel for gasoline), Petrobras would trade at an average yield of 20% on cash flow in the period between 2024 and 2025.

IPP VS. EPP SCENARIOS

• IPP with current spreads: 26% average FCF yield
• EPP with current spreads: 20% average FCF yield
• IPP with average spreads: 19.5% average FCF yield
• EPP with average spreads: 14% average FCF yield

PRICING FOR CONSUMERS

According to Goldman Sachs analysts, while the shift from IPP to EPP could result in significant changes in fuel prices ex-refinery, they see the effects “smoothed out” for consumers due to the effects of taxes, ethanol/biodiesel dilution, and other factors.

They report that they considered in their calculations the resumption of federal taxes (zeroed for diesel until the end of the year, while the rates for gasoline are partial), with the detail that the government determined that the new tax collection should be per liter, no longer a percentage of prices.

“We note that the proposed ICMS per liter for gasoline is higher than the current national average charge of R$0.25.”

“This would put further pressure on consumer prices, even in a scenario of delayed and stable Brent barrel prices for lower spreads,” the report says.

In short, for diesel, they estimate that under any pricing policy (IPP or EPP), the trend is for prices to fall for consumers (even accounting for the resumption of taxes).

On the other hand, for gasoline, which has a higher tax burden, analysts see little room for lower prices, even if Petrobras switches to the TPP and spreads stay at the average.

“We will still only see stable gasoline prices at the pump.”

“This could potentially put pressure on the company to reduce gasoline prices at the refinery, even below the initial PPE, to reduce prices at the pump,” the report says.

EXAMPLES FROM EMERGING MARKETS

Goldman Sachs brings examples of three emerging countries and their fuel pricing practices for comparison.

They are China, India, and South Africa.

In China, the government sets a price ceiling for refined products, which considers the price of crude oil and a theoretical refining margin (set by the government).

This margin represents the maximum price that markets can trade (companies can operate below the ceiling).

In addition, for oil prices below US$40 a barrel, fuel prices are not adjusted downward, and the difference is put into a reserve fund for energy-related purposes.

As for international crude oil prices above US$130 a barrel, refined products are not adjusted upward (or only slightly adjusted), protecting customers from rising oil prices abroad.

Since 2017 diesel and gasoline prices have been adjusted daily in India.

The country considers factors such as the international oil price, taxes, transportation costs, etc.

Analysts say that prices are not updated daily, and the government can set the values, mainly by adjusting fuel taxes.

“In general, we note adherence to international prices but also recognize some discretion in setting fuel prices,” the analysts write.

Finally, South Africa readjusts its values monthly, on the first Wednesday of each month.

“The government performs the calculation of fuel prices daily, and the monthly price change is lower than international prices by one month,” the Goldman report describes.

Gasoline prices are composed of an international element: the cost of importing the fuel from a foreign refinery and transporting it to South African shores (essentially IPP).

In addition, the government includes taxes, fees, and margins to arrive at the price paid by the consumer.

With information from Forbes