Petrobras Rallies on New Fuel Price Policy Speculation

Petroleo Brasileiro SA gained the most in seven months after the state-run energy company said it’s asking the government to raise local fuel prices to international levels in an effort to contain import losses.

Petrobras, as the Rio de Janeiro-based company is known, rose 7.6 percent to 19.89 reais in Sao Paulo, the biggest gain since March 7. The company’s voting shares rose 9.8 percent to 19 reais, leading gains on Brazil’s benchmark index.

The company reported quarterly earnings that missed analyst estimates by 41 percent after a combination of record demand for diesel, a slump in the local currency and a production shortfall at refineries increased fuel import losses. Chief Executive Officer Maria das Gracas Foster said in a Oct. 25 statement that she is seeking a fuel policy that brings local prices more into line with global levels.

“This new methodology may improve the company’s future numbers,” Ari Santos, an equity trading manager in Sao Paulo at H. Commcor, said in a telephone interview. “With the stock rising so much, investors run to cover all short positions.”

Imported gasoline and diesel prices exceed those in Brazil even after four price increases since June 2012. Imported gasoline cost 20 percent more than local fuel in the quarter because the government, which control’s Petrobras’s board, prohibits fuel sales at market prices to control inflation, Itau Unibanco Holding SA said in a note to clients.

Profit Drop

“This situation has been affecting our cash flow and leverage,” Foster said in the statement. “The Executive Board designed and presented to the board of directors a fuel pricing methodology to be applied by the company, whereby the alignment of diesel and gasoline domestic prices to international prices will become more predictable.”

Petrobras and the government will review the policy again at a Nov. 22 board meeting, Chief Financial Officer Almir Barbassa said today in conference call. If approved, the policy would have automatic increases or decreases based on international prices, Barbassa said. Petrobras currently needs to request government approval for each price adjustment.

Net income dropped to 3.39 billion reais ($1.55 billion), or 26 centavos a share, from 5.66 billion reais, or 43 centavos, a year earlier.

Refining Losses

The company’s refining unit posted an operating loss of 8.59 billion reais in the quarter as Petrobras had planned stoppages at three refineries. Fuel imports climbed to 493,000 barrels a day in the period, an increase of 89 percent from the previous quarter, Petrobras said in the report. Per-share profit excluding some items trailed the 44-centavo mean of 12 analysts’ estimates compiled by Bloomberg.

“Petrobras’s profitability in the third quarter was reduced by the fuel price gaps,” Auro Rozenbaum, an analyst at Bradesco SA who rates the stock a hold and doesn’t own any, said by telephone from Sao Paulo ahead of the report. “By the end of August the gap reached a record level.”

Petrobras has increased prices for gasoline 15 percent and diesel 22 percent since June 2012 to reduce the discount with international prices. The gap narrowed to about 10 percent in the fourth quarter after Brazil’s currency rebounded and international crude prices fell, making imported gasoline cheaper, Rozenbaum said.

The real weakened to the lowest level in more than four years in August, prompting the the central bank to announce a $60 billion program of currency swaps and credit line auctions. The real then appreciated more than all currencies tracked by Bloomberg since Aug. 22 and reached 2.1523 per dollar on Oct. 17, the highest level since June 14.

Doubling Production

The growing cost of fuel subsidies comes as Rio de Janeiro-based Petrobras increases investments to develop deepwater fields in the so-called pre-salt region that holds the biggest group of oil discoveries this decade. Investments in the first nine months of the year rose 16 percent to 69 billion reais, Petrobras said. Investments in exploration and production climbed 55 percent to 38 billion reais, it said.

Petrobras is investing $237 billion over five years to build refineries, develop deepwater fields and ramp up output at Lula, the second-largest discovery in Brazil’s history after Libra. Petrobras took a 40 percent stake in the Libra field in a government auction on Oct. 21.

Petrobras expects domestic crude production to double to 4.2 million barrels a day in 2020 as it adds more than 30 production units to fields in deep waters of the Atlantic. It plans to increase refinery output 50 percent during the period to allow it to phase out fuel imports.

Oil and natural gas production was little changed in the third quarter at 2.5 million barrels a day, the company said.

The earnings report was released after the close of trading on Oct. 25.

“An increase in price fuels would help the company to improve results in the coming quarters,” Sandro Fernandes, a trader at brokerage Geraldo Correa, said by phone from Belo Horizonte, Brazil.

Before it's here, it's on the Bloomberg Terminal.