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Petrobras Cash Drain Blunting Oil Output Push: Corporate Brazil

Petroleo Brasileiro SA's Reduc Refinery
Petrobras is the world’s most indebted crude producer as it spends $220.6 billion over five years to drill, refine and market oil trapped miles beneath the Atlantic Ocean’s floor. Photographer: Dado Galdieri/Bloomberg

June 3 (Bloomberg) -- Petroleo Brasileiro SA is set to reverse two years of output declines as it starts tapping the biggest group of oil discoveries this century. Halting its five-year share slide probably will take longer.

Petrobras, as Brazil’s crude producer is known, had the worst returns on equity and assets of the 10 largest publicly traded oil companies in the past year, data compiled by Bloomberg show. Delays in developing the giant finds and delivering on output goals have erased more than half the Rio de Janeiro-based company’s market value in the past five years.

Losses of $31 billion in three years at its fuel unit and the cost of drilling some of the world’s deepest wells mean Petrobras probably will continue to be less lucrative than Russian state-run peers OAO Rosneft and OAO Lukoil, Citigroup Inc. said. Petrobras is the world’s most indebted crude producer as it spends $220.6 billion over five years to drill, refine and market oil trapped miles beneath the Atlantic Ocean’s floor.

“The sad thing is these results have not come more quickly, and that’s why investors have lost so much money,” said Russ Dallen, head trader at Miami-based Caracas Capital Markets. “It’s a cheap version of an Exxon Mobil or a ConocoPhillips. Sadly, it will remain a cheaper version.”

Exxon Mobil Corp. and ConocoPhillips have returned 14 percent and 36 percent to investors in the past year, compared with a 16 percent loss from Petrobras, the worst performance of any oil company worth more than than $50 billion, according to data compiled by Bloomberg. Petrobras trades at 8.3 times estimated earnings this year, compared with a ratio of 13 for Exxon and 13 for ConocoPhillips. Petrobras shares are down 2.6 percent so far this year, cutting its value to $93 billion.

Most Volatile

The gradual adjustment of fuel prices will improve Petrobras’s financial results and reduce its leverage, the company said in an e-mailed response to questions. The company also has 267.5 billion reais of assets under construction and the resulting increase in oil and fuel production will improve the company’s return on capital. Fuel imports will decline as it expands the refining network, it said.

President Dilma Rousseff’s office didn’t respond to e-mails requesting comment on the company’s stock performance and fuel price policy. The finance ministry declined to comment in an e-mailed response.

Brazil’s policy to force Petrobras to sell imported fuel for less than it pays to stem inflation puts it at a further disadvantage relative to peers, according to Citigroup.

Petrobras fell the most in five years in December the day after dashing investors’ hopes it would set a market-based fuel pricing methodology, and continued slumping until it hit a nine-year low in March. Since then it has posted the biggest rally among peers in the past three months on speculation Rousseff, who has used Petrobras to subsidize fuel imports since 2011, may be voted out of office.

No Bounce Back

“Petrobras is probably one of the biggest challenges for money managers in the equity space,” said Guilherme Ache, a co-manager at Squadra Investimentos in Rio de Janeiro. In recent years “almost anyone who has tried to bounce back with Petrobras has lost money.”

While Citigroup estimates production gains and fuel prices may add as much as $10 billion a year, the bank says it will still take more than two years for the producer to generate total positive cash flow.

“Potential improvements are not large enough to bear the risk of its debt load and underlying continuous expansion in the medium term,” Citigroup analysts led by Graham Cunningham said in a May 22 research report. “In contrast to Petrobras, Rosneft and the rest of the Russian oil industry do not subsidize the Russian economy with low-priced oil products.”

The Brazilian company, the biggest producer in waters deeper than 1,000 feet, planned to increase output 9.4 percent annually from 2010 through 2014 when it started developing the so-called pre-salt reserves off Rio’s coast.

Instead output has remained flat amid equipment delays and faster-than-expected declines at older fields closer to shore.

Output Gains

Petrobras now expects to boost domestic output 7.5 percent this year and has already anchored two of the five offshore production units it plans to add. It has also dedicated staff and equipment to arrest declines at the Campos Basin where it extracts most of its crude, according to its business plan.

Still, with Brazilian engineering companies busy with unfinished projects related to the soccer World Cup this month and building those for summer Olympic Games in 2016, concerns that Petrobras’ plans will be derailed again loom large. Many of the companies that are building sports venues and urban upgrades are also Petrobras suppliers.

Business also probably will be bogged down in coming months as companies enter wait-and-see mode before the October presidential elections, said Ted Harper, who helps manage more than $10 billion for Frost Investment Advisors LLC in Houston.

More Delays

“With the multitude of things going on in Brazil over the next six to 12 months -- the elections, the World Cup, and eventually the Olympics -- it seems somewhat problematic,” Harper said by phone. It’s unlikely “you’re going to have a smooth-glide path toward continued recovery in production.”

Uncertainty over fuel-import costs and production growth has made Petrobras the most volatile major oil stock in the past year, according to data compiled by Bloomberg.

“It would have a double-digit rise at least if subsidies were eliminated,” Luana Helsinger, an oil and gas analyst at brokerage GBM Brasil, who has the equivalent of a buy rating on the stock and expects output growth of this year of about 6 percent, said by telephone from Rio. “Petrobras’s business plan isn’t viable the way it is, something has to change.”

To contact the reporter on this story: Peter Millard in Rio de Janeiro at

To contact the editors responsible for this story: James Attwood at; Jessica Brice at Carlos Caminada

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