Petrobras Besting Sugar Mills in Ethanol Boom: Corporate Brazil

Petroleo Brasileiro SA, the state-run oil producer, stands to profit the most from Brazilian measures to boost ethanol output as rising biofuel supplies reduce the need to sell imported gasoline at a loss.

Surging demand for ethanol made from sugar cane will help Rio de Janeiro-based Petrobras cut gasoline imports by about 20 percent this year to an average 52,415 barrels a day, said Salim Morsy, an analyst at Bloomberg New Energy Finance in Sao Paulo. For millers from Sao Martinho SA to Biosev SA, tax breaks and an increase in the mandatory use of ethanol mixed with gasoline won’t be enough to offset a 48 percent slump in sugar prices since early 2011, industry association Unica said.

President Dilma Rousseff’s stimulus for millers to process a record sugar-cane crop into ethanol will help Petrobras pare losses at its fuel-supply unit from $17.5 billion last year. Petrobras also benefits as the second-largest shareholder of petrochemicals maker Braskem SA, which won tax incentives along with ethanol mills starting this month, Banco do Brasil SA equity analyst Carolina Flesch said.

“We are talking about a package of measures that, coupled with cost cutting and higher output, should help the company to improve margins,” Flesch, who raised Petrobras to the equivalent of a buy from hold after the April 23 tax breaks were announced, said in a telephone interview from Sao Paulo. “I’m sanguine about coming quarters.”

Share Returns

Petrobras, the biggest loser among the world’s 10 largest oil producers by market value last year after Moscow-based OAO Gazprom, is returning 3.2 percent including dividends this year. The returns are trailing those for San Ramon, California-based Chevron Corp., London-based BP Plc, The Hague-based Royal Dutch Shell Plc and Irving, Texas-based Exxon Mobil Corp., according to data compiled by Bloomberg.

The company traded at 8.1 times estimated 2013 earnings yesterday, compared with 9.9 times for Chevron and 11.9 times for Colombia’s Ecopetrol SA, data compiled by Bloomberg show. It fell 0.3 percent to 19.49 reais at 12:27 p.m. in Sao Paulo.

Petrobras is rated a buy by 13 analysts surveyed by Bloomberg. Seven recommend holding the stock. None say sell.

An official at Petrobras in Rio de Janeiro, who asked not to be named citing internal policy, said the company won’t comment on the fuel imports and benefits from rising ethanol output.

Profit beat expectations in the first quarter after Petrobras boosted fuel production, reduced imports and ramped up refinery output. Profit fell 17 percent from a year earlier to 7.69 billion reais, exceeding the 7.41 billion-real average estimate of five analysts compiled by Bloomberg. Sales rose 9.7 percent to 72.5 billion reais.

Ethanol-Gas Blend

Brazil is spurring a surge in output of biofuel made from cane after increasing the mandatory amount blended with gasoline to 25 percent from 20 percent since May 1 and offering loans and tax breaks for ethanol mills as of May 8. Brazil is the biggest ethanol producer and consumer after the U.S., where the fuel is made from corn.

Ethanol output in Brazil’s Center South, the world’s largest sugar-cane producing area, almost tripled last month from a year earlier, rising to 1.58 billion liters (417 million gallons), according to millers group Unica.

Mills will get tax credits equal to as much as 12 centavos (6 cents) a liter of biofuel sold. The alternative fuel was sold for 1.36 reais a liter on average in April, according to the University of Sao Paulo’s Cepea agricultural commodities research agency.

New Investments

While spurring more ethanol output, the incentive for mills won’t boost sales enough to encourage investments to revamp plants and counter falling profit margins after international sugar prices plummeted in the past two years, Antonio de Padua Rodrigues, technical director at Unica, said on April 29. Increasing ethanol output will allow Petrobras to cut fuel imports by about half, said Adriano Pires, head of the Brazilian Center for Infrastructure, a research firm.

“It’s a package of measures designed to help Petrobras,” Pires said by telephone. “The ethanol industry needs more. It needs long-term policies if you want to see new investments.”

Rising demand for auto fuel in Latin America’s biggest economy led Petrobras to import a record 87,000 barrels a day of gasoline last year, double the amount imported in 2011. Gasoline sales increased 17 percent in 2012 to 570,000 barrels a day, the company said in its April 26 earnings report.

Price Caps

The government, which controls Petrobras’s board with a 50.26 percent voting stake, caps the price the company can charge fuel distributors as part of a policy to keep inflation in check. It allowed Petrobras to raise diesel prices 11 percent and gasoline prices 6.6 percent this year, narrowing the discount to international prices.

Brazilian consumer prices rose 6.49 percent in the year through April, near the high end of the central bank’s target range.

Petrobras, led by Chief Executive Officer Maria das Gracas Foster, is now selling gasoline to distributors for about 9 percent less than the price it pays abroad, said Auro Rozenbaum, a Sao Paulo-based analyst at Banco Bradesco SA. The gap narrowed from an average of about 20 percent last year, helped by the domestic price rise and falling international prices, he said.

The ethanol measures “just put a short-term patch over the problem,” Carlos Jesus, an analyst at Lisbon-based bank Caixa Banco de Investimento SA, who rates the stock a hold, said in a telephone interview. “If the gap between international and domestic prices widens, you’ve got a problem again no matter how much higher the ethanol blend is.”

Petrobras will post a profit of 31.8 billion reais this year, according to the average of nine analysts’ estimates compiled by Bloomberg, up from 21.2 billion in 2012.

“The company has improved operational efficiency and on top of that you have the government measures,” Flesch said. “It’s a good start and they are on the right track.”

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