Petrobras Says Real Slump May Hurt Profits on Debt Costs

Petroleo Brasileiro SA (PETR4) expects the real’s 16 percent slump in the past two months may reduce profit this quarter as the cost of servicing dollar-denominated debt rises in local-currency terms.

The state-controlled oil producer will likely book a financial loss, following a 2.9 billion-real ($1.6 billion) gain in the second quarter, should the Brazilian currency hold below 1.7 per dollar, Chief Financial Officer Almir Barbassa said in an interview in Rio de Janeiro today.

The Brazilian real, whose 48 percent rally in the past 10 quarters helped Petrobras pare dollar-denominated borrowing costs, slumped in the past two months as Greece’s struggle to avoid a debt default prompts investors to reduce holdings of higher-yielding emerging-market assets. The real tumbled to as low as 1.8451 per dollar earlier today, the lowest since June 10, 2010.

“If it is going to be in the range of 1.7, we’ll have some loss,” Barbassa said at the company’s headquarters. “The debt we have denominated in dollars is about 70 percent of total debt, and if you adjust that regarding the exchange rate variation, yes, the impact will come.”

Petrobras plans to spend $224.7 billion in the five years through 2015, the oil industry’s largest investment program, as it develops the Western Hemisphere’s largest oil discoveries in more than three decades. It plans to more than double production in the next 10 years.

Financing Needs

The oil producer may need between $7 billion and $12 billion of new financing per year, Barbassa said. The international capital market will be “the most important source we have” for financing, he said.

The rising cost of importing gasoline may also reduce Petrobras’s profit in the third and fourth quarters, said Eduardo Favrin, who oversees about $3.2 billion as head of equities for HSBC Global Asset Management in Sao Paulo.

“If the exchange rate during the fourth quarter stays at this level, the fourth quarter will be much worse,” Favrin said. “They have a huge rise in imports, in the case of gasoline and ethanol, so the devaluation will not only be about debt but the operating margins as well.”

The decline in Brazil’s real has been gradual and can be absorbed by the economy, Finance Minister Guido Mantega said to reporters in Washington today.

Petrobras gained 42 centavos, or 2 percent, to 21.02 reais in Sao Paulo trading at 2:03 p.m. New York time. Before today, the stock lost 25 percent this year, more than the 19 percent decline for the Brazilian benchmark Bovespa Index.

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Peter Millard in Rio de Janeiro at Pmillard1@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net