Petrobras Profit Falls as Fuel Losses Counter Cost Cuts

Petroleo Brasileiro SA posted a 30 percent drop in quarterly profit, in line with analysts’ estimates, after cost-cutting efforts by the biggest crude producer in deep waters were blunted by losses at its fuel unit.

First-quarter net income declined to 5.39 billion reais ($2.28 billion), or 41 centavos a share, from 7.69 billion reais, or 59 centavos, a year earlier, the Rio de Janeiro-based company known as Petrobras said in a statement after the close of regular trading yesterday. The average per-share estimate of 13 analysts tracked by Bloomberg was 42 centavos.

Imported gasoline and diesel sold at a loss to domestic distributors because of price caps are weighing on profit as President Dilma Rousseff uses the state-run company to rein in inflation ahead of elections in October. Petrobras has sought to close the gap between domestic and foreign prices, while cutting operating expenses. The government started using the company to subsidize fuel in 2011, when Rousseff took office.

“It will be very difficult to have an adjustment in an election year,” Luana Helsinger, an oil and gas analyst at brokerage GBM Brasil, who has the equivalent of a buy rating on the stock, said by telephone from Rio.

Petrobras fell 1.2 percent to 17.67 reais in Sao Paulo yesterday. The shares have lost 13 percent in the past year, the worst performance among 15 global peers tracked by Bloomberg, which had an average gain of 15 percent. Trading at 8.57 times estimated earnings, Petrobras is the group’s cheapest stock.

Refining Ramp-up

Fuel imports rose 13 percent from a year earlier, generating a first-quarter loss for the company’s refining unit of 7.4 billion reais. Profit at its gas unit slumped 41 percent.

Price increases of 4 percent for gasoline and 8 percent for diesel that took effect Dec. 2 were the first in nine months. The increases failed to close the gap between local and foreign prices.

Petrobras’s cash flow will improve after it starts a new refinery later this year, Chief Executive Officer Maria das Gracas Foster said in the statement. The company will also “gradually” adjust domestic prices to international benchmarks, she said.

Petrobras, the only gasoline and diesel producer in Brazil, ran its 11 crude refineries at an average 96 percent of capacity during the quarter in an attempt to lower reliance on imports. The over-stretching of workers and machinery was one of the reasons behind fires at two plants in December and January, according to the country’s oil workers union.

Most Debt

Petrobras’s debt of more than $100 billion is the highest of any publicly traded oil company, data compiled by Bloomberg show. That compares with about $82 billion at PetroChina Co. and about $66 billion at Russia’s OAO Rosneft, the two most indebted crude producers after Petrobras.

A fourfold increase in the obligations in five years prompted Moody’s Investors Service to cut its rating on Petrobras’s debt by one level last year to Baa1, the third-lowest investment grade.

The company is investing $221 billion in the five years through 2018 as it develops deposits trapped beneath a salt layer miles below the Atlantic Ocean’s floor in deep waters off Brazil’s southeastern coast. The company raised a cost-saving target for 2013-16 to 37.5 billion reais from 32 billion reais.

Given the financial needs to develop the so-called pre-salt reserves, borrowing costs will remain at record levels, said Carlos Gribel, vice president for emerging markets at INTL FCStone Securities in Miami.

Higher debt is coupled with the company’s expectation that it won’t generate positive net cash flow this year. Petrobras has posted about $40 billion in operational losses at its refining and distribution unit since it started subsidizing fuel imports in 2011.

Seeking Parity

“Based on the decisions of the Brazilian federal government, as our controlling shareholder, we have, and may continue to have, periods during which our product prices will not be at parity with international product prices,” The company said in an April 30 regulatory filing.

Petrobras plans to boost domestic crude output 7.5 percent this year as it connects wells to production equipment in deep waters of the Atlantic. A combination of equipment delivery delays, unplanned maintenance at offshore platforms and faster-than-expected declines at the company’s legacy fields in the Campos Basin has left production almost flat since 2010.

“It’s not like they’re still wildcatting, trying to find the resource, they just need to bring that online,” Chris Kettenmann, an analyst at Prime Executions Inc., said in a telephone interview from New York. “The policy situation in my mind can only improve. How much worse can it really get?”

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