Petrobras Beats Estimates on Record Refining, Currency Hedge

Petroleo Brasileiro SA, the world’s biggest crude producer in deep waters, reported second-quarter profit that exceeded analysts’ forecasts on record output at its refineries and a currency hedge that narrowed financial losses.

Net income was 6.2 billion reais ($2.7 billion), or 48 centavos a share, compared with a loss of 1.35 billion reais in the year-earlier period, Brazil’s state-controlled producer said on Aug. 9 in a regulatory statement. Per-share profit excluding some items was expected at 45 centavos, the average of 13 analysts’ estimates compiled by Bloomberg.

Petrobras averted 7.98 billion reais in financial losses after implementing accounting changes in May to protect it from currency swings that have eroded profits at other Brazilian companies with foreign debt. Vale SA, the world’s largest iron-ore producer, said Aug. 7 that second-quarter profit plunged 84 percent, missing analysts’ estimates, after real weakness generated losses on its $30 billion debt.

“If you have dollar-denominated debt, you have to protect yourself from currency price volatility,” said Gianna Bern, president of risk-management adviser Brookshire Advisory and Research, in the telephone interview from Chicago. “They’re actively taking steps to minimize fluctuations in currency.”

Brazil’s real was the worst-performing emerging market currency in the quarter, losing 9.4 percent against the U.S. dollar. The most indebted publicly-traded oil company borrowed $15.1 billion during the quarter, including $11 billion in dollar-denominated bonds, to finance its business plan, it said.

‘All Cylinders’

Petrobras, based in Rio de Janeiro, lifted output of refined products 6.5 percent to 2.1 million barrels a day, reducing the amount of diesel and gasoline it sold under subsidized prices.

“Brazilian refineries are really firing on all cylinders, and that has helped minimize imports,” Bern said.

Fuel imports fell 47 percent to 261,000 barrels a day while sales rose 8.2 percent to 73.6 billion reais, less than the 74.7 billion-real average estimate. The refining network reached record processing rates of 2.2 million barrels a day on June 29 and June 30, Petrobras said.

Brazil’s government, which control’s Petrobras’s board through a majority of voting shares, hasn’t adjusted fuel prices since March in a bid to control inflation. Petrobras has increased prices for gasoline 15 percent and diesel 22 percent since June 2012 to reduce the discount with international prices. Losses at Petrobras’s refining and supply division narrowed 62 percent to 3.8 billion reais.

Tax Drop

“The imports are particularly important because they sell into a market that is priced well below what they are paying,” T.J. Conway, a research and advisory manager at New York-based Energy Intelligence Group, said by telephone from Washington.

Petrobras’s royalties and taxes, which are partially based on Brent oil prices, fell 5.3 percent from a year earlier to 7.2 billion reais.

The decline in the oil price in the quarter had less of an impact on Petrobras than other large producers because fuel prices were little changed in Brazil, Auro Rozenbaum, an analyst at Banco Bradesco SA, said by telephone from Sao Paulo before the earnings report was released.

“When oil prices go down, revenue stays stable, and costs plunge because the government take goes down,” said Rozenbaum, who rates the shares hold and doesn’t own any. “When you have diesel and gasoline prices fixed, the company is short in oil.”

Petrobras used a Brent price of $102.44 a barrel to calculate second-quarter results, down from $108.19 a year ago, according to the statement.

Four Platforms

Petrobras added four production vessels during the first half, compared to one unit during all of 2012, in an effort to resume growth after output has hovered around 2.6 million barrels a day since 2010.

The biggest producer in waters deeper than 1,000 feet expanded oil and gas production in June to the most since December after adding a second floating, production storage and offloading unit, or FPSO, to Brazil’s second-largest crude discovery.

“They had four platforms come on line; that’s huge,” Bern said. “From an operational standpoint, this is a turning point.”

Petrobras expects crude production in Brazil to double to 4.2 million barrels a day in 2020 as it adds more than 30 production units to fields in deep waters of the Atlantic.

$174 Billion

The company, which is investing $237 billion over five years to build refineries, develop deepwater fields and increase output, will add Brazil’s biggest discovery to its pipeline of projects when the government auctions the Libra field in October. Petrobras, which will take at least a 30 percent stake in Libra, has an option to expand its stake during the bidding round.

Libra holds 8 billion to 12 billion barrels in recoverable reserves, topping the 6.5 billion at Lula, Brazil’s hitherto biggest discovery, also located in deep waters of the southern Atlantic. Libra will cost Petrobras and its partners $174 billion to develop over 35 years, according to the country’s oil regulator.

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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