Petrobras Refinery Fires Dim Profit Outlook: Corporate Brazil

Petroleo Brasileiro SA’s two refinery fires in five weeks are darkening its profit outlook as the state-run oil producer may be forced to slow down fuel output and increase imports resold at subsidized prices.

Petrobras, as the world’s most indebted oil company is known, had its 2014 earnings-per-share estimates cut 5.8 percent by analysts in the past four weeks, the most among the 11 most valuable oil companies, data compiled by Bloomberg show.

The producer, which hasn’t expanded refining in Brazil since the 1980s and last year ran units at almost full capacity, is coming under pressure from labor unions that blame the strain on aging plants and worker shortages for the fires. Output constraints worsen its earnings outlook as the government has Petrobras selling fuel below import costs in a bid to keep inflation below the 6.5 percent upper limit of its target range.

“Refineries at full capacity to some extent diminished the negative impact from selling gasoline for a relatively low price in Brazil,” said Nick Robinson, head of Brazilian equities at U.K.-based Aberdeen Asset Management Plc, which manages about $15 billion of Latin American shares and owns Petrobras stock. “Any reduction in the refining capacity available to them is obviously a negative.”

Petrobras declined to comment on its refining capacity and earning estimates in an e-mailed response to questions. Running refineries at 92 percent of capacity on average last year was in line with top-performing U.S. units, Petrobras said in a Jan. 7 regulatory filing, without naming the North American plants. Output rose 8 percent from 2012 to 2.03 barrels a day.

Weakening Currency

A possible extension of the Brazilian real’s 7.7 percent slump in the past three months, which makes overseas purchases more costly in local-currency terms, along with any increase in U.S. gasoline prices, may exacerbate import losses this year, Robinson said.

Fuel output at almost full throttle helped the Rio de Janeiro-based company post $5.7 billion of earnings for its supply division last year through September, turning around about $9 billion of losses a year earlier that mainly stemmed from imports. The company doesn’t break down how much the division loses just from fuel imports.

The main difference relative to U.S. refineries is that they were prepared to run at that level of capacity over several years and didn’t suffer the same strain as Petrobras units where there was a sudden shift, Wood Mackenzie Ltd.’s Michael Wojciechowski said.

‘High Risk’

“There’s a high degree of risk because you might be pushing your equipment to extremes,” Wojciechowski, the head of Americas downstream at the oil research firm, said by telephone from Houston. “Any of us can speed up for small bursts but we may strain a muscle or otherwise cause our heart to stop.”

Petrobras is the only gasoline and diesel producer in Brazil, operating three of the 10 biggest refineries in Latin America and the Caribbean, according to data compiled by Bloomberg. Its largest is the Replan plant in Sao Paulo state, with capacity to process 390,000 barrels a day, making it the second-biggest in the region behind Venezuela’s Paraguana.

The crude producer, which the government controls with a majority voting stake, sought approval from its board to implement automatic price increases for fuel it sells to distributors to bridge a gap with international prices. The board, led by Finance Minister Guido Mantega, on Nov. 29 allowed the company to raise its price for gasoline and diesel 4 percent and 8 percent, while keeping the formula private.

Brazilian Inflation

The increase helped push up consumer prices 0.92 percent in December, the highest month-on-month inflation rate since April 2003. Annual inflation accelerated to 5.9 percent last year from 5.8 percent in 2012.

Brazilian magazine Veja reported Jan. 11 that President Dilma Rousseff opposes further fuel price increases, without saying how it obtained the information. The presidential office didn’t respond to an e-mailed request for comment.

Even after the cuts in past weeks, the $1.02 average earnings per share forecast would make this the best year for Petrobras since 2011. In local currency terms, earnings before interest, taxes, depreciation and amortization of 79.7 billion reais estimated by 21 analysts would be the best since at least 2002.

While Petrobras is struggling with the impact of fuel imports, its Sao Paulo-traded shares could be poised to rebound in view of its crude reserves and production prospects, Aberdeen’s Robinson said.

Growth Potential

In U.S. dollar terms, the stock has lost 64 percent in the past four years, the worst performance among the most valuable oil producers. Petrobras trades at 8.23 times reported earnings versus a 10.43 peer average, the data show. Shares fell 0.3 percent to 15.73 reais at 11:32 a.m. in Sao Paulo today.

“They’re trading at certain levels where it’s hard to envision much downside,” he said. “Given the assets they already have and the potential they have to grow, then when things get a bit more normal there’ll probably be some reasonable upside there.”

Still, uncertainty over fuel prices continue to weigh on Petrobras, according to Marco Tavares, chairman of Rio de Janeiro-based research firm Gas Energy.

“What is concerning is the way in which the Brazilian market is being managed, with subsidies for gasoline and diesel,” Tavares said in a phone interview. “Petrobras has a very important loss from imports.”

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