Petrobras Record Spend Defies Ballooning Debt: Corporate Brazil

Photographer: Dado Galdieri/Bloomberg

A customer pays an attendant at a Petroleo Brasileiro SA station in Rio de Janeiro. Close

A customer pays an attendant at a Petroleo Brasileiro SA station in Rio de Janeiro.

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Photographer: Dado Galdieri/Bloomberg

A customer pays an attendant at a Petroleo Brasileiro SA station in Rio de Janeiro.

Petroleo Brasileiro SA’s record spending and deteriorating production are fueling concern that debt is nearing unsustainable levels at the state-run oil company, already the world’s most indebted major producer.

A 2.8 ratio of debt to earnings before items in the fourth quarter exceeded an internally set limit because of all-time high capital expenditures, according to data compiled by Bloomberg. Announcing a 16 percent capex increase this year, Chief Executive Officer Maria das Gracas Foster reminded investors yesterday of the company’s role in driving the economy and creating jobs.

The biggest producer in waters deeper than 1,000 feet (305 meters) is struggling with the dual priorities of extracting crude from miles below the Atlantic seabed and keeping debt low enough to maintain its investment-grade rating. Petrobras also subsidizes imported gasoline and diesel as part of the government’s policy to rein in inflation.

“They spend big amounts to bring production up, but at some point you will have to see that reflected in the numbers,” Oliver Leyland, who helps manage about 1 billion reais ($504 million) in stocks including Petrobras at Mirae Asset Global Investments, said by phone from Sao Paulo. “It’s testing everyone’s patience.”

Voting shares slumped to the lowest since 2005 yesterday after the company announced different dividend payments for preferred and ordinary shares for the first time in more than a decade. While Chief Financial Officer Almir Barbassa said the dividend measure will help protect cash, Itau Unibanco Holding SA analysts said that’s not supported by the spending increase.

The stock fell 2.7 percent to 17.60 reais in Sao Paulo, more than the 0.8 percent drop in the benchmark stock index.

Debt Jumps

Petrobras increased total debt 26 percent last year, while posting the first annual output decline since 2004. For every $100 of revenue in the fourth quarter, Petrobras had a gross profit of $23, down from $26 a year earlier and $38 in the same period of 2009, according to data compiled by Bloomberg.

Debt could reach a level that forces the company to trim investments, Cornel Bruhin, who helps manage $3.9 billion at MainFirst, said by phone before quarterly results were released.

Petrobras, whose debt-to-equity ratio rose to the highest since 2010 in the fourth quarter, has lost stock investors 36 percent in the past year in U.S. dollar terms, the worst performance among oil producers with a market value of at least $50 billion, according to data compiled by Bloomberg.

Pre-salt

The 2013 investment plan “doesn’t seem sustainable” considering stagnant oil output and lower spending would encourage investors, UBS AG analyst Lilyanna Yang said in a research report yesterday. Petrobras will stick with its announced investments and won’t reduce outlays, Foster said yesterday in a conference call to discuss quarterly results.

“How are they going to deal with these levels of investments with the drop in profitability?” Bradesco SA analyst Auro Rozenbaum said by phone from Sao Paulo. “With these gaps in fuel prices, there’s a concern with the debt level.”

Petrobras’ leverage has increased because the company is going through a “difficult period” where production isn’t growing, Barbassa told analysts on yesterday’s call.

“We are investing steadily to deliver on our projects and believe we will reverse this situation in time,” he said.

Brazil has had more oil discoveries over the past decade than any other country and Petrobras has accelerated output from the so-called pre-salt region that holds the country’s largest deposits. Pre-salt output jumped 7.5 percent in December to 292,500 barrels a day after Petrobras added new wells, the National Petroleum Agency said Feb. 5.

‘Good Geology’

“When you look at what else is going on in the industry, they are sitting on some very good geology,” Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago, said in a telephone interview. “In the longer term I think the stock will rebound.”

Annual output may drop for a second time in 2013 as the company grapples with another “difficult” year of shutting offshore platforms for scheduled maintenance and having natural decline rates at fields where it has been producing since the 1970s, Foster said yesterday. Petrobras expects domestic crude output to be 2 percent above or below last year’s level. Production won’t start increasing until the second half of the year, Foster said.

‘Enormous Reluctance’

“The biggest concern for the market right now is that production isn’t rising and there aren’t any more gasoline adjustments,” Dany Rappaport, who helps manage 250 million reais at Investport in Sao Paulo, including Petrobras shares, said by phone. “There is an enormous reluctance to buy Petrobras.”

Petrobras went through three “intense” debates with the government before the last three fuel price increases, and still sells fuel below international prices, Foster said. Still, the company doesn’t have any plans to reduce investments this year, she said.

“We have a fundamental role in creating and maintaining jobs in Brazil,” Foster said. “Brazil needs us to grow. We have an important participation in economic growth.”

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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