For Petrobras Bondholders, Oil’s 35% Surge Is Actually Bad News

By Peter Millard

(Bloomberg) –- For embattled oil producer Petroleo Brasileiro SA, the 35 percent surge in crude prices since March should be a godsend. In fact, it’s making life even worse for the state-controlled company.

Petrobras, which imports gasoline because it doesn’t produce enough to meet demand in Latin America’s biggest economy, is unable to raise fuel prices in Brazil because of government-imposed subsidies. Not only is it unable to pass on to consumers the cost of the more expensive fuel, it’s also selling it at a bigger and bigger loss domestically as the real plunges.

That’s undermining Petrobras’s attempt to reduce the biggest debt load among global oil producers in the wake of a bribery scandal that plunged the company into junk status. Its $2.5 billion of bonds due in 2024 have now lost 4.5 percent since reaching a five-month high on April 27, when it released long-delayed audited earnings. That’s three times the average drop in emerging markets.

“Petrobras is adhering to policies that are destructive to its balance sheet,” said Wilbur Matthews, the San Antonio-based chief executive officer of Vaquero Global Investment, which oversees more than $100 million. “One of the cornerstones of bad policy in Brazil is Petrobras’s pricing policy. It’s a case study in how poorly managed this company is.”

Petrobras didn’t respond to an e-mail requesting comment on the subsidy and the bond losses. President Dilma Rousseff’s office declined to comment.

Brazil Inflation

Brazil’s gasoline subsidy -- kept in place as part of an effort to combat soaring inflation -- has cost Petrobras about $40 billion since 2011 and contributed to a 79 percent increase in the company’s debt.

With cost-of-living increases in Brazil reaching an 11-year high of 8.8 percent this month and the economy reeling, there seems to be little chance the government will allow Petrobras to charge more for gasoline any time soon.

“There is an inflation problem, so raising prices on gasoline is tough,” Jason Brady, a money manager at Thornburg Investment Management Inc. who helps oversee $74 billion, said by telephone from Santa Fe, New Mexico.

The freefall that sent oil to a seven-year low earlier this year reduced the cost of importing fuels and offered Petrobras a chance to recoup the billions of dollars it lost selling gasoline and diesel at a discount during the bull market of 2011 to 2014, when crude surpassed $120 a barrel.

Real Sinks

Now, not only has crude traded in New York jumped to $61.08 a barrel as of 9:50 a.m. Wednesday, but the real has plunged 14 percent this year, the most in emerging markets.

Yields on Petrobras’s 2024 notes have climbed 0.42 percentage points to 6.69 percent.

“There needs to be a demonstration of the company’s authority and mandate on domestic petroleum product pricing,” Michael Roche, a fixed-income strategist at Seaport Group, said by telephone from New York. “It would start to unwind the advances in valuation in the company’s publicly traded securities, particularly its bonds.”

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