Petrobras Falls on Concern Investments Too Large to Fund

Petroleo Brasileiro SA, the world’s most indebted oil company, fell in Sao Paulo on concern continued fuel subsidies ordered by the government will make it hard to fund its business plan even after a $16 billion cut announced yesterday.

Preferred shares of Petrobras, as the state oil company is known, dropped 3.5 percent to 13.68 reais, the lowest in more than three weeks. The benchmark Ibovespa index of Brazilian stocks fell 0.3 percent.

Petrobras has been selling imported gasoline and diesel below cost to help the government fight inflation, causing profit to decline at a time when the company is planning $220.6 billion of investments to develop new oil discoveries. While the drop in fourth-quarter net income reported yesterday was smaller than analysts expected, the results weren’t enough to allay concern about the business outlook for the company.

Petrobras’s business plan “relies, once again, on optimistic assumptions -- aggressive long-term production targets, price parity, strong local currency -- in order to fund the company’s largely unchanged, massive capex plan,” Banco Santander SA’s analysts Christian Audi and Gustavo Allevato wrote in a note to clients.

Net income in the last three months of 2013 dropped to 6.28 billion reais ($2.68 billion), or 48 centavos a share, from 7.8 billion reais, or 59 centavos, a year earlier, according to a Petrobras statement. Per-share profit excluding some items beat the 41-centavo average of 12 analysts’ estimates compiled by Bloomberg.

Price Policy

The company, based in Rio de Janeiro, said it was cutting its investment plan through 2018 by $16 billion, or 6.8 percent. Investments in the refining division will drop to $38.7 billion from $64.8 billion in the previous plan.

Petrobras increased the price of gasoline by 4 percent and the price of diesel by 8 percent on Nov. 29, the first boost in nine months, as part of its attempt to cut the gap between global and domestic prices. The refining division has lost about $37 billion since 2011, when the government, which owns the majority of the company’s voting shares, started making Petrobras subsidize imported fuel.

“We had hoped that the government would allow the company to include a slight increase in diesel and gasoline prices in the announcement, helping make this assumption a bit more credible,” Banco Itau SA analysts led by Paula Kovarsky said in a research report.

Rising Debt

The company’s $114.3 billion in debt makes it the most indebted oil company in the world, according to data compiled by Bloomberg.

Higher debt is coupled with the company’s expectation that it won’t generate positive cash flow until 2016, while posting the highest negative cash flow among global oil producers. The five-year business plan calls for $12.1 billion in yearly borrowing on average.

The rising debt encouraged the company to reduce investments in refining and focus on expanding crude production, said Gianna Bern, president of Chicago-based risk-management adviser Brookshire Advisory & Research.

“Something had to give,” Bern said in a telephone interview. “They are re-directing capital spending to the higher-margin, higher-value upstream side of the business over the lower-margin refining side of the house.”

Election Year

In the face of concerns over weak economic growth this year in Brazil, the government probably won’t change its stance on fuel prices any time soon as it prepares for presidential elections in October, Joao Castro Neves, an analyst at Eurasia Group, said by telephone from New York.

In October, Petrobras presented a proposal to the board to create a methodology for adjusting prices automatically. On Nov. 29, the board authorized the first fuel-price increase in nine months without divulging a formula for future adjustments. The stock plunged 9.2 percent the next trading day.

Brazil’s government expects the economy to grow 2.5 percent in 2014 and inflation to reach 5.9 percent.

After the stock slumped 18 percent in the past year, 14 of 19 analysts covering the company recommend buying. The other five have a hold rating.

“Making our shares valuable and the fair return to our shareholders is the result of the natural fulfillment of our obligations,” Chief Executive Officer Maria das Gracas Foster said in a letter published with the earning report.

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