Petrobras Outlook Dims on Fuel Disappointment: Corporate Brazil

Petroleo Brasileiro SA is poised to be the biggest earnings disappointment among major crude producers as the Brazilian real’s slump exacerbates fuel-import losses, eroding gains from surging global oil prices.

Analysts reduced their quarterly earnings estimates for Rio de Janeiro-based Petrobras by 21 percent in the past three months, the most among the world’s 22 most valuable oil and natural gas companies, data compiled by Bloomberg show. EOG Resources Inc.’s outlook is improving the most, with forecasts raised 15 percent on average, the data show.

Brazil’s government, which controls Petrobras with a majority of voting shares, limits local fuel prices to avoid fanning inflation and requires the company to import more-expensive supplies to make up for a refining shortfall. While speculation Brazil would increase prices for a third time this year sent Petrobras shares to a two-month high last month, there’s been no further relief from losses that are being exacerbated by the second biggest slump among major currencies. That’s countering crude export gains that are boosting prospects for companies including Houston-based ConocoPhillips.

“The weakness of the real makes the difference between prices in Brazil and abroad even worse,” Carlos Jesus, an analyst at Caixa Banco de Investimento SA in Lisbon, said in a phone interview. The advantage of higher revenues from exports, “isn’t enough” to compensate for loses in the domestic market.

Most Indebted

The government last allowed Chief Executive Officer Maria das Gracas Foster to lift fuel prices in March. The surprise 5 percent jump pared the discount to prices abroad to about 10 percent and propelled a 15 percent surge in the company’s shares. Gasoline prices also were increased on Jan. 29.

Losses on gasoline and diesel, combined with local taxes that are tied to crude prices, mean Petrobras probably is the only crude producer that loses money when international oil prices increase, UBS AG analysts Lilyanna Yang and Bruno Varella wrote in a note to clients dated Sept. 4.

Petrobras declined to comment in an e-mailed response.

In the past six months, the real has weakened 8.9 percent against the U.S. dollar, the steepest decline among major currencies after the Australian dollar. That’s stifling Brazil’s efforts to contain annual inflation, which has exceeded 6 percent in eight of the past nine months. The central bank’s target range is from 2.5 percent to 6.5 percent.

The real’s decline has helped spur speculation that the government will allow further price gains for the world’s most indebted oil producer, whose borrowings and costs are mostly in dollars. The stock jumped as much as 6 percent Aug. 15 ahead of a board meeting and 3.3 percent Sept. 16 following a report by Estado newspaper that another increase is on the way.

Oil Gain

Petrobras’s price policies are being maintained for now, Finance Minister and Petrobras Chairman Guido Mantega told reporters in Sao Paulo yesterday after saying Aug. 26 that depreciation won’t necessarily prompt an increase. His press office declined to comment in an e-mailed response to questions.

Brent crude has risen 5 percent in the past three months while Petrobras shares are up 15 percent, swelling its market value to $108 billion. The shares trade at 8.23 times estimated profit compared with a 10.24 peer-group average. Petrobras rose 1.1 percent to 18.56 reais at 2:10 p.m. in Sao Paulo.

Even if a one-time price increase were authorized, it wouldn’t have a substantial effect on earnings, according to Banco Santander SA analyst Christian Audi in New York.

“A 5-10 percent price increase should have a positive but only temporary impact on the stock,” Audi wrote in a report to clients dated Sept. 16. “To have a more meaningful and sustainable impact, we believe that an announcement of a recurring price increase policy would have to be made, which is unlikely at this point in time.”

‘Isn’t Fair’

The company is working to bring local fuel prices more in line with global gauges, Foster told reporters Sept. 27.

“Petrobras’s market value isn’t fair,” Foster said. “I’m certain that with growing production, with these refining levels and our discipline, we will deliver what analysts and investors want. We are very close to delivering. I’m certain that with price parity, without volatility,” the stock price will rise, she said.

The state-run producer probably will report adjusted third-quarter earnings of 22 cents a share, down from 21 cents a year ago, according to the average estimate of 10 analysts tracked by Bloomberg. EOG, the biggest owner of drilling rights in the Eagle Ford Shale in southwest Texas, probably had $1.89 earnings per share, up from $1.73, the data show.

Refinery Spend

The company plans to spend $237 billion in the five years through 2017, with about 27 percent of that earmarked for refining, distribution and retail operations in a bid to cut dependency on imported fuels.

Monthly fuel production grew 15 percent to 66.5 million barrels in July from 57.7 million in January 2012, the month before Foster took over, according to data from the Brazilian oil regulator. Still, imports rose 6.8 percent in the first six months from a year earlier, according to the data. Crude imports were up 8.7 percent in the same period.

As long as the gap continues, Petrobras will be affected, with or without a recovery in the real, according to Auro Rozenbaum, an analyst at Banco Bradesco SA.

“Foreign exchange isn’t a problem in itself, the problem is that fuel prices are capped,” Rozenbaum said by telephone from Sao Paulo. “Forex increases the fixed-price problem.”

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