Investors are worried about Petrobras after Lula da Silva’s election, says Fitch

For the rating agency Fitch, the possible changes in the management of Petrobras are one of the biggest concerns of investors after the election of Luiz Inácio Lula da Silva to the Presidency of the Republic.

“The election of da Silva worries investors, given his past with the company. Lula da Silva was implicated in Operation Lava Jato, which investigated alleged receipt of bribes by executives to sign contracts with construction companies at inflated prices,” wrote Saverio Minervini, Fitch’s senior director in Brazil, in a report released Friday, Nov. 4.

“The then ex-president was convicted of money laundering and corruption, receiving a sentence of nine and a half years, later increased to 17 years. He served 580 days, and his trial was annulled at the Supreme Court.”

For Fitch, the Petrobras of 2022 is “fundamentally different” than in the period of the Workers’ Party (PT) management, having a much more solid accounting structure.

“The company has restructured itself by paying down nearly US$100 billion in debt, 25% of which was financed through divestitures of non-core assets, and has positioned itself to increase production at a lower cost than its peers. Leverage and liquidity have become compatible with the ‘A’ rating category,” the report explains.

Therefore, the rating agency considers the existence of few economic fundamentals to interfere with Petrobras because the company should generate strong cash flows, even with the expectation of a drop in the oil price to US$55 per barrel.

Moreover, according to Fitch, the government is the primary beneficiary of the company’s significant tax revenues and dividends, which can amount to nearly 1% of GDP.

“Allowing Petrobras to maintain its financial policies and business plan is the best financial strategy for the federal government,” Fitch wrote.

The Union receives US$22.4 billion from the state-owned oil company and US$25 billion in dividends from its 28.7% stake. This amount should reach US$30 billion, representing 1.5% of the GDP and 1.7% of the Union’s revenues.

FITCH FORESEES CHANGES IN PETROBRAS’ MANAGEMENT

Fitch pointed out how likely Lula will appoint new members to the Petrobras Board of Directors.

“Historically, the government uses its authority to influence Board decisions,” the analysts wrote, explaining how “da Silva is unlikely to make any immediate material changes to calm stakeholders, but the history of Brazil and the region shows that state-owned companies are used as political instruments to fulfill a broader agenda.”

For Fitch, da Silva’s choices for finance minister and top management positions at state-owned companies and banks will be the first signs of the political direction he intends to take.