Petrobras Executive Exodus Clouds Emergence From Graft Case

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Behind the Resignation of Petrobas CEO das Gracas Foster

The resignation of Petroleo Brasileiro SA’s senior management team sowed more confusion about the future leadership of the company as a widening corruption probe shuts it out of debt markets and jeopardizes investment plans.

State-run Petrobras’ board will meet Friday to elect replacements for Chief Executive Officer Maria das Gracas Foster, who isn’t implicated in the allegations, and five of her managers. Shares, which surged 15 percent Tuesday as management overhaul speculation mounted, swung between gains and losses before closing up 0.2 percent to 10.02 reais.

The team’s departure won’t immediately resolve a debate over writedowns needed to account for graft-related costs that has deadlocked the board. The news came in a one-sentence filing that didn’t say if executives will remain at their posts until replacements are found. By noon, no single candidate had emerged publicly to replace Foster and no internal announcement about the changes had gone to employees, who were glued to televisions and searching websites for information.

“There was a lot of speculation and suspense regarding a change in Petrobras management, so the way the government found to end the expectation may not have been ideal,” Guilherme da Nobrega, chief economist at the brokerage firm Guide Investimentos, said by telephone from Sao Paulo.

A record 23 billion reais ($8.9 billion) in suspect transactions have been uncovered in the probe, dubbed Carwash. Three former Petrobras executives have been arrested including ex-refining head Paulo Roberto Costa as part of the investigation into contractor kickbacks. One was later released.

Candidate Search

The departure of Foster -- a 61-year-old engineer, who rose through the ranks to become the first female CEO of Latin America’s largest publicly traded oil company in 2012 -- was announced after the company lost $100 billion in market value from a September peak as she grappled to gauge the losses from the alleged kickback scheme at a time of slumping crude prices.

The writedown debate has delayed the release of earnings and kept Petrobras out of international debt markets, threatening its spending plans and Brazil’s economic revival.

Chief Financial Officer Almir Barbassa and the heads of the gas, exploration, refining and engineering divisions were among the executives to resign, two people briefed on the matter said. There was no announcement of a successor or interim leadership and Petrobras’ declined to elaborate.

President Dilma Rousseff, who met with Foster in Brasilia Tuesday, had already asked Finance Minister Joaquim Levy to help find candidates to replace former ministers on Petrobras’ board, said a government official, who asking not to be named because matter hasn’t been made public.

‘Market Friendly’

“A potential replacement with market friendly names could be seen as positive news in the longer term,” HSBC analyst Luiz Felipe Carvalho said in note to investors. “However, we do not believe that the government will reduce its interference in the company during the next years.”

Foster’s departure probably will improve Petrobras’ outlook because it means the government is trying to fix management and may have a more friendly approach to outside investment, according to Eurasia Group analysts led by Christopher Garman.

“With low oil prices and Petrobras’s financial difficulties, the incentives to lean more on international oil companies to help develop the pre-salt have grown substantially,” the Eurasia analysts wrote about the company’s offshore discoveries. “It is clear that any substitute to Graca is likely to be someone with industry credentials and capable of conducting a ‘house cleaning’ of the firm.”

Previous Attempts

The scandal has also engulfed Brazil’s largest construction companies, which may bring public works projects to a halt, and threatens the presidency of Rousseff, who served as Petrobras chairman during some of the time when the alleged graft was occurring.

Foster, a frequent guest at the presidential palace in Brasilia, had offered to resign “one, two, three times” after the company was forced to delay quarterly results because of the scandal, she told reporters on Dec. 17. Foster said then that she would stay in the job as long as the president trusted her. Rousseff has been a personal friend since the two worked together at the Ministry of Mines and Energy in 2003.

Pressure on Foster started to build in October, when the company’s external auditor refused to sign off on quarterly results. She faced resignation calls after a recently demoted Petrobras executive alleged she’d ignored corruption warnings in the past. The company said Dec. 15 that Foster acted swiftly to pursue claims of corruption and misconduct.

Management Style

Brazil Prosecutor General Rodrigo Janot, who is leading an investigation into any political links from the alleged corruption, called for the company to replace its management in a Dec. 9 speech.

Foster’s departure is in stark contrast to her appointment as CEO. When she was first reported to be a candidate for the job, Petrobras surged 18 percent in less than a month as investors bet her technical background would benefit the company’s management style and offset the government’s political intervention in business decisions.

Foster’s first steps included removing Costa and two other directors, who are now under arrest or under investigation by prosecutors and police. Foster also slashed production growth estimates, toughened negotiations with suppliers and criticized the previous management for missing targets.

She also attacked budget overruns at the Abreu & Lima refinery in northeastern Brazil, one of the main projects where contractors and Petrobras officials are now accused by prosecutors of colluding to divert funds. Part of these funds allegedly went to political parties in the ruling coalition, according to testimony that is part of the court record.

Fuel Subsidies

Initial investor enthusiasm for Foster waned after she failed to eliminate fuel subsidies that have caused more than $44 billion in operating losses since early 2011. The government controls Petrobras’s board through a majority of voting shares.

Last week, Foster announced the shelving of refinery projects and said an appraisal of assets had identified potential total writedowns of 88.6 billion reais, including the effect of alleged kickbacks.

“The market expected management changes, but the timing caught everyone by surprise,” Henrique Florentino, an equity analyst at UM Investimentos, said by telephone from Sao Paulo. “It will be positive if someone renowned, with no political ties, is announced, but we will have to wait and see”.

The company has lost 58 percent since she took over on Feb. 13, 2012, making it the worst-performing major oil stock tracked by Bloomberg.

SEC Probe

Foster’s exit comes at a time when Petrobras is trying to speed oil output growth after increasing the number of production vessels extracting crude from the largest crude discoveries in the Western Hemisphere in almost 40 years.

The company, which is also being investigated by the U.S. Securities and Exchange Commission and had at least four class actions lawsuits filed in the U.S., must report audited results in the coming months to avoid violating bond agreements.

Speaking to the press at the company’s headquarters before Christmas, Foster said she’d had to hand over her laptop, iPhone and iPad to independent investigators, who have a one-year contract to probe the corruption allegations.

“This is good for the company,” she said, wearing a Petrobras-logo shirt. “We aren’t afraid of the truth.”

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