Petroleo Brasileiro SA (PETR4) plans to stem losses from fuel imports using cheaper Brazilian-made biofuels as analysts forecast profit will decline to an eight-year low.
Petrobras, as the company is known, is asking the government to let it mix more sugarcane-based ethanol into its gasoline, two officials with knowledge of the discussions, who asked not to be identified because the matter isn’t public, said June 29. The move would help halt losses estimated at $375 million as refinery shortages force the company to import fuel.
Chief Executive Officer Maria das Gracas Foster obtained permission from the government, which controls Petrobras’s board, for a fuel price increase on June 15 to reduce the discount to international prices. She started meeting last month with analysts and investors in Rio de Janeiro, New York and London to explain how the company will fund $236.5 billion of investments over five years and more than double oil production by 2020.
“Brazil just hasn’t got enough refineries to produce gasoline to meet internal demand,” Erick Scott Hood, an analyst at SLW Corretora, said by telephone from Sao Paulo. “If Petrobras reduces gas imports and keeps oil exports at current levels, it has a bigger chance of boosting profits.”
Petrobras is the second-worst performer among major oil producers this year, losing 14 percent for investors as Colombia’s Ecopetrol SA (ECOPETL) and China’s CNOOC Ltd. (883) returned 37 percent and 17 percent, respectively, according to data compiled by Bloomberg. China Petroleum & Chemical Corp. lost 15 percent.
Petrobras shares slid 1.6 percent to 19.29 reais at 11:34 a.m. in Sao Paulo, matching a decline by Brazil’s Bovespa index.
The company will report second-quarter net income of 3.9 billion reais ($1.9 billion), according to the average estimate in a Bloomberg survey. That would be the worst result since the second quarter of 2004, according to data compiled by Bloomberg. Net income slid 16 percent in the first quarter to 9.2 billion reais from 11 billion reais a year earlier.
The request to increase ethanol levels would reverse a government decision last year after a drop in output of the biofuel pushed up fuel prices and threatened to stoke inflation.
Brazilian authorities are considering the request and reviewing if there’s enough ethanol supply to increase the mandate, said the two officials.
Fuel imports climbed 46 percent in the first quarter to 406,000 barrels a day from the year earlier, according to information on Petrobras’s website.
Rising imports will probably reduce earnings by 750 million reais this year as the company is often forced to buy the fuel abroad for more than it’s allowed to sell it for in Brazil, said Adriano Pires, head of consulting firm Brazilian Center for Infrastructure.
Under the proposal being considered by the government, the ethanol mix in gasoline would be increased to 25 percent from 20 percent, according to the government officials. In August, the government cut the mandate to 20 percent from 25 percent. A 5 percentage-point increase in the mix would pare Petrobras gasoline imports by as much as 40 percent, Pires said.
Petrobras’s refineries have been selling fuel at a discount to average prices in the U.S. Gulf Coast since the start of 2011, according to a June 25 presentation.
The company’s previous business plan called for a 78 percent increase in refinery output to 3.2 million barrels a day in 2020 to meet growth in domestic demand. The state-run company removed output targets from the 2012-2016 business plan, simply stating that it is building or planning to build an additional 1.6 million barrels a day of capacity.
Petrobras originally planned to start production at the 230,000-barrel-a-day Northeast refinery, formerly known as Abreu e Lima, last year. The project is 58 percent complete and will start processing crude in 2014 after construction delays and cost increases.
“It’s a story that needs to be learned, written about and read by the company so that it isn’t repeated,” CEO Foster told reporters on June 25.
Petrobras declined to comment for this story yesterday. The company hasn’t asked for an increase, Miriam Guaraciaba, a Petrobras spokeswoman, said by telephone from Rio de Janeiro last week. The finance ministry declined to comment, a press officer said in an e-mailed response.
Allowing Petrobras to increase ethanol levels in gasoline may be a short-term solution to its import losses, according to Marcos Paulo Fernandes Pereira, an analyst at Votorantim CTVM.
``In the long run, Petrobras’s price policy tends to have a diluted effect on results,'' he said. ``While they are experiencing losses now with imports, they have in the past gained from importing gas cheaper than what they sold in Brazil. This reality could turn if oil prices fall abroad.''
Authorities have taken measures to prevent a repeat of the ethanol shortages that triggered last year’s decision to cut levels in fuel, such as offering credit to boost output and storage capacity, said Jose Carlos Vaz, executive secretary for the agriculture ministry. A recovery in prices of the biofuel is also encouraging producers, he said in an interview from Brasilia.
Greater ethanol supplies could also mean that pump prices wouldn’t be affected by the measure, said Pires.
“Everyone could win with this decision,” Pires said by telephone from Rio de Janeiro. “Petrobras could lower its import losses, the government could avoid an inflation impact and the environment also wins because a bigger ethanol percentage on the mix equals cleaner fuel.”
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