Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil producer, is asking the government to raise domestic fuel prices to international levels after third-quarter earnings missed analyst estimates by 41 percent.
A combination of record demand for diesel fuel, a slump in the local currency and a production shortfall at domestic refineries increased fuel import losses in the third quarter, Petrobras Chief Executive Officer Maria das Gracas Foster said in a Oct. 25 statement. Net income dropped to 3.39 billion reais ($1.55 billion), or 26 centavos a share, from 5.66 billion reais, or 43 centavos, a year earlier.
Fuel imports are curbing profit as imported gasoline and diesel prices exceeded those in Brazil even after four price increases since June 2012. Imported gasoline cost 20 percent more than domestic fuel in the quarter because the government, which control’s Petrobras’s board, prohibits fuel sales at market prices to control inflation, Itau Unibanco Holding SA said in a note to clients.
“This situation has been affecting our cash flow and leverage,” Foster said in the statement. “The Executive Board designed and presented to the board of directors a fuel pricing methodology to be applied by the company, whereby the alignment of diesel and gasoline domestic prices to international prices will become more predictable.”
The government, which control’s Petrobras’s board with a majority of voting shares, will assess the pricing methodology through Nov. 22, Petrobras said in a separate statement.
The company’s refining unit posted an operating loss of 8.59 billion reais in the quarter as Petrobras had planned stoppages at three refineries. Fuel imports climbed to 493,000 barrels a day in the period, an increase of 89 percent from the previous quarter, Petrobras said in the report. Per-share profit excluding some items trailed the 44-centavo mean of 12 analysts’ estimates compiled by Bloomberg.
“Petrobras’s profitability in the third quarter was reduced by the fuel price gaps,” Auro Rozenbaum, an analyst at Bradesco SA who rates the stock a hold and doesn’t own any, said by telephone from Sao Paulo ahead of the report. “By the end of August the gap reached a record level.”
Petrobras has increased prices for gasoline 15 percent and diesel 22 percent since June 2012 to reduce the discount with international prices. The gap narrowed to about 10 percent in the fourth quarter after Brazil’s currency rebounded and international crude prices fell, making imported gasoline cheaper, Rozenbaum said.
The real weakened to the lowest level in more than four years in August, prompting the the central bank to announce a $60 billion program of currency swaps and credit line auctions. The real then appreciated more than all currencies tracked by Bloomberg since Aug. 22 and reached 2.1523 per dollar on Oct. 17, the highest level since June 14.
The growing cost of fuel subsidies comes as Rio de Janeiro-based Petrobras increases investments to develop deepwater fields in the so-called pre-salt region that holds the biggest group of oil discoveries this decade. Investments in the first nine months of the year rose 16 percent to 69 billion reais, Petrobras said. Investments in exploration and production climbed 55 percent to 38 billion reais, it said.
Petrobras is investing $237 billion over five years to build refineries, develop deepwater fields and ramp up output at Lula, the second-largest discovery in Brazil’s history after Libra. Petrobras took a 40 percent stake in the Libra field in a government auction on Oct. 21.
Petrobras expects domestic crude production 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. It plans to increase refinery output 50 percent during the period to allow it to phase out fuel imports.
Oil and natural gas production was little changed in the third quarter at 2.5 million barrels a day, the company said.
The earnings report was released after the close of trading on Oct. 25. Petrobras rose 25 centavos, or 1.4 percent, to 18.49 reais in Sao Paulo trading Oct. 25. The stock has dropped 5.3 percent this year compared with an 11.2 percent slide in Brazil’s benchmark Ibovespa index.
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