Petrobras Responds Well to Profit Slump

By Doug Gray, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Less than one week after a successful bid for a forty percent share of the Libra pre-salt oil field, Petrobras’ third trimester financial report made for uncomfortable reading among investors on Monday. The company’s net profits were down 39 percent on the same period last year, but the promise of a new pricing structure in a bid to reduce costs has boosted the company’s share price.

With the government continuing its policy of demanding the company sells imported oil at less than market value to keep inflation in check, the profits of R$3.395 billion were well short of those forecast. Market expectations had previously been put at anywhere between R$4.47 billion and as much as R$6 billion. As the results were detailed on Monday, October 28th from Petrobras’ headquarters in central Rio, directors blamed a weakening real (down eleven percent against the dollar), exacerbating the effect of an eight percent increase in the market price of diesel.

“Despite the fact that we produce the derivative in our refineries, and with greater efficiency, we are having to import the remainder. That importation also came at a time of a weakened real, passing R$2.4 to the dollar,” said Almir Barbassa, president of investor relations.

The average price paid per barrel of crude was just over R$240, compared to the R$210 at which Petrobras sells to the Brazilian market. The sizable shortfall is despite four increases in the price of diesel in the last sixteen months, which is up 21.9 percent on the middle of 2012.

After an extended meeting in Brasília with Finance Minister Guido Mantega last week, company President Maria das Graças Foster was forced to confirm that Petrobras had sufficient resources to pay their share of Libra’s R$15 billion signing bonus. Her 2013-2017 business plan, part of a more ‘realistic’ approach to production targets, outlined an investment program of US$236 billion that looks like being increasingly difficult to hit.

The vast costs involved in pre-salt exploration and production, as well as the lengthy delays before they are recouped, have brought something of a cash-flow crisis at the oil giant. Legally, a minimum of thirty percent of any offshore project must belong to Petrobras, spreading not just financial but also human resources thinly, and a step-up in production was announced earlier in the year in a bid to bolster the balance sheet.

Nevertheless, the company’s preferred share price (PBR) was up more than seven percent when the markets opened this week thanks to a timely announcement that a new pricing methodology was being drawn up to better align the costs with the international rates. Tied to internal factors like production and refining and without political involvement, it is designed to lessen the impact of currency fluctuations and inflation, removing the threat of the highest peaks and troughs.

“This methodology has as at its heart the greater predictability in cash flow of the company and a view that, with it, there will be a reduction in leverage [use of third-party capital for investment],” Barbassa said. Thanks to Petrobras, the BOVESPA stock exchange also enjoyed a strong start to the week.