Petrobras’s Next Steps May Be Tougher Than $17 Billion Loss

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Petrobras Scandal to Cost $2.1B: What’s Next?

Petrobras’s massive writedowns this week answer the question about the cost of its corruption and pose a much bigger one: whether the state-run driller can restore its role as Brazil’s economic anchor and source of national pride.

The problem is not just graft. The writedown for its executives’ transgressions represents less than one-eighth of Petrobras’s $17 billion in charges reported for 2014. The bulk of the impairment was due to mismanagement of two refinery projects. It was enough to give Petrobras its first annual operating loss since 1991.

The former state bankers now running the world’s most indebted oil company averted disaster by getting long-delayed 2014 earnings audited, thus removing grounds for creditors to accelerate repayment of part of Petrobras’s $135 billion debt. What remains to be seen is how well they can insulate the oil giant from decisions that make sense politically but turn out to be calamitous in a business context, while reducing debt and delivering projects on time and budget.

“The biggest lesson to understand is that Petrobras’s management structure, built from political appointments, doesn’t work,” said Alvaro Marangoni, who helps manage $500 million as a partner with Quadrante Investimentos in Sao Paulo.

The first sign of a new direction at Petroleo Brasileiro SA is the absence of government ministers on the new board of directors, said Joao Augusto de Castro Neves, Latin America director for Washington-based consultant Eurasia Group. The previous board was chaired by former Finance Minister Guido Mantega, and before him Dilma Rousseff, who was chief of staff to Brazilian President Luiz Inacio Lula da Silva at the time and is now the country’s president herself.

Fuel Losses

It was Mantega’s concern about inflation that led Petrobras to buy fuel abroad to sell to Brazilians at a loss, keeping prices low for consumers but running up Petrobras’s debt. Other instances of government meddling, from letting political allies appoint executives to investing in far-flung refineries that were never finished, were just as costly.

Now the company says the next chairman will be Murilo Ferreira, chief executive officer of mining company Vale SA, who will take over from Luciano Coutinho, president of the state development bank BNDES. Petrobras has also jettisoned many of the managers beholden to the politicians who pushed job-creating projects like Comperj, the still-unfinished chemical plant in Rio de Janeiro that contributed 21.8 billion reais ($7.3 billion) to last year’s impairment.

Petrobras CEO Aldemir Bendine described the oil company as the country’s “crown jewel” and urged Brazilians to have the confidence to invest in the company.

“I want to apologize in the name of Petrobras employees, because today I’m one of them,” Bendine said at a press conference after audited 2014 earnings were published Wednesday. “Today marks the rescue of the company’s credibility.”

Debt Pile

Petrobras stock this week recovered enough to wipe out all losses since Nov. 13, the day before police expanded the corruption investigation. The stock rose 2.8 percent Friday to 13.28 reais at 3:23 in Sao Paulo.

Despite shedding potential political snags, many analysts remain negative on Petrobras, at least in the short term, because of its debt pile and less-than-inspiring production outlook. Petrobras has missed production targets every year for at least a decade.

The financial know-how of Bendine and his Chief Financial Officer Ivan Monteiro, both from state-owned Banco do Brasil SA, must be coupled with the oil-industry knowledge of other executives for the company to thrive, said Castro Neves of Eurasia Group.

It will also take a firmer hand to overcome the scandal that’s marred the company’s balance sheet and global reputation, said Marangoni of Quadrante Investimentos.

“What Petrobras needs is a shock of meritocracy,” he said.

As the global industry adjusts to lower oil prices, it will be less forgiving of the extra costs that come from partnering with Petrobras, Eric Farnsworth, vice president of the Council of the Americas, said by phone from Washington. The requirement that a percentage of Petrobras’s purchases be local, subpar infrastructure and reserves buried more than a mile under the ocean make operating in Brazil more expensive at a time when energy companies are cutting costs.

Good News

Even so, there are positive signs. “The good news for Brazil is that the oil is there,” said Castro Neves.

Royal Dutch Shell Plc’s $70 billion purchase of BG Group Plc, announced April 8, expands Shell’s participation in Brazil’s vast pre-salt oil fields and was seen by analysts as a vote of confidence in Petrobras. Shell CEO Ben van Beurden said Brazil would account for at least 20 percent of the company’s oil production by the end of the decade.

Petrobras is “a very strong and very competent company, very strong in the development of deep-water projects,” van Beurden said in Brasilia Thursday after meeting with Rousseff. “I have 100 percent confidence that Petrobras will come through this, and will probably come stronger than it was before.”

It helps to have at least 50 billion barrels of oil offshore waiting to be drilled. The pre-salt reserves are still profitable with current low oil prices, van Beurden said.

Divestment Plan

Petrobras also closed four deals this month worth $6.1 billion to secure its financing needs for the year, in addition to a $3.5 billion loan from China Development Bank.

The oil company’s $13.7 billion divestment plan will probably include both upstream and downstream assets, according to local media reports. Petrobras is also studying the sale of part of its participation in the pre-salt oil fields, according to six people with knowledge of the proposal.

The easiest, most immediate solutions, such as further raising fuel prices and selling a piece of the pre-salt fields, are also the most politically difficult, Castro Neves said.

“There’s always going to be some kind of conflict of interest because Petrobras is a publicly-traded company that’s under government control,” he said. “There’s no easy way out.”

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