Petrobras (PETR4) said July 12 it would boost diesel prices by 6 percent, three weeks after it increased gasoline and diesel prices for the first time in seven months. The government, which controls Petrobras with a majority of voting shares, had resisted higher prices to avoid fanning inflation in the world’s second-largest emerging market. Petrobras has sold fuel below international prices since the start of 2011.
The price increases may help Petrobras improve its earnings outlook compared with global peers, whose margins are being pared by a 10 percent drop in oil prices this year, according to Oliver Leyland at Mirae Asset Global Investments. Petrobras’s net income fell 16 percent in the first quarter of this year, more than all other major oil companies except for BP Plc, according to Bloomberg Industries data.
“They’re delivering what needs to be done to avoid a balance sheet blowout in the next 24 months,” Leyland, who helps manage about 1 billion reais ($494 million) in stocks, including Petrobras, said in a telephone interview from Sao Paulo. “Inflation has slowed substantially, so that opens the room to more price increases.”
Petrobras shares have lost 16 percent for investors this year in U.S. dollar terms, the worst performance among the world’s 10 biggest oil companies by market value. The Brazilian company is expected to post a 14 percent drop in 2012 net income, the biggest decline among major producers for at a second year, according to data compiled by Bloomberg.
Petrobras rose 0.4 percent to 19.33 reais in Sao Paulo. The stock fetches eight times reported profit, according to data compiled by Bloomberg.
Petrobras plans to invest $236.5 billion in the five years through 2016 as it accelerates production of oil trapped under as much of 3,000 meters (9,800 feet) of salt and rocks below the Atlantic seabed. The company plans to borrow $80 billion to finance the plan and service its debt.
“If the company’s finances continue to be stretched, the government will continue to give ground on price increases,” Christopher Garman, an analyst who covers Latin America at Eurasia Group, said in a telephone interview from Washington. “That’s much less costly to the government’s industrial policy priorities than Petrobras rolling back its capex plans.”
Petrobras’s budget includes local procurement requirements of as much as 65 percent to guarantee it will finance a local shipbuilding and oil services industry to help create jobs. Brazilian shipyards are expanding to build drillships and platforms to help develop the biggest discoveries since Kazakhstan found the Kashagan field in 2000.
The world’s biggest producer in waters deeper than 1,000 feet cut its output targets last month to 5.7 million barrels a day in 2020, an 11 percent drop from the previous plan, as it struggles to acquire the equipment and platforms needed to tap the so-called pre-salt oil reserves. The local content requirements have delayed projects, Petrobras said in its business plan.
The most recent adjustment reduced the diesel price gap to 13 percent compared with Gulf of Mexico prices, Banco Itau BBA SA analyst Paula Kovarsky said in a July 12 note. Import costs expand the discount to 27 percent, she said.
“The downside looks limited,” Kovarsky said in a telephone interview from Sao Paulo. “It was a reality check.”
Petrobras’s revenue in the past 12 months was lower than any other oil company worth more than $100 billion except for Colombia’s Ecopetrol SA, which produces a third of Petrobras’s output, Bloomberg Industries data show. Chevron Corp. (CVX), the oil company with the closest output levels to Petrobras, had 57 percent more revenue during the period, the data show.
Brazil’s slowing economy and weakening Chinese demand for its minerals and agricultural exports has turned investors sour on Brazil in general, Ricardo Correa, an analyst at Ativa SA in Rio de Janeiro, said in a telephone interview. As Brazil’s largest publicly traded company, Petrobras stands to lose from a general Brazil pullback, he said.
“Foreign investors are leaving Brazil and Petrobras is a way out,” he said. “Narrowing down the gap is good, but it’s not the end of the problem.”
Petrobras is also suffering from a shift in the oil industry to shale fields on land where advanced drilling techniques such as horizontal wells and hydraulic fracking have boosted production in the U.S.
Investors are more interested in companies tapping these new fields than deep water producers including Petrobras, Robbert Van Batenburg, head of research at Louis Capital Markets LP in New York, said in a telephone interview.
“There was a time when deep water fields were the flavor of the day,” he said. “We’ve moved on from that. It may scream attractive on some metrics, but it’s elusive.”