Petrobras Bonds Can’t Win as Oil Surge Deepens Fuel Loss

The biggest surge in oil prices in a year would usually be a reason to buy the securities of energy producers. Not in Brazil, where government policies are punishing Petroleo Brasileiro SA.

Petrobras notes due in 2023 have lost 1 percent since June 9, when Brent crude prices started a nine-day, 6 percent advance as Iraqi forces battled insurgents. That’s the biggest decline among integrated oil companies with BBB rated bonds tracked by Bloomberg. Through May, Petrobras debt securities had notched the largest gain of the year, returning 9.6 percent.

President Dilma Rousseff has maintained gasoline and diesel price caps since 2011, while Petrobras’s refining division is unable to meet domestic demand, so higher international prices exacerbate losses on fuel sales. They also signal increased royalty payments and taxes for the Rio de Janeiro-based producer, which has the largest cash-flow deficit of any publicly traded oil company in the past 12 months.

“It’s worse for them,” Omar Zeolla, a corporate credit analyst at Oppenheimer & Co., said by telephone from New York, referring to oil price gains. “Dilma could get re-elected and they could keep the same policies, the same prices.”

In an e-mailed response to questions, Petrobras declined to comment on the link between the performance of its bonds and the rise in oil prices. Rousseff’s press office also declined to comment. The bonds rose 0.42 cent on the dollar to 95.69 cents at 12 p.m. in New York today.

Balance Sheets

In Latin America, the only national oil companies that pay for fuel subsidies are Brazil and Venezuela, said Luisa Palacios, managing director and head of Latin American research at Medley Global Advisors, a provider of policy research for institutional investors.

While Mexico and Argentina have a history of subsidizing fuel imports, it is the government, not Petroleos Mexicanos and YPF SA, that picks up the tab, Palacios said. In Colombia, Ecopetrol SA regularly adjusts prices in line with international rates.

“For other oil companies, it’s a straightforward trade,” Palacios said by telephone from New York. “Pemex, Ecopetrol and YPF do not have the cost of of the subsidies on their balance sheets, versus what Petrobras does, and that makes a difference in how investors or markets can assess the impact of higher oil prices.”

Most Debt

Brazilian Finance Minister Guido Mantega turned down Petrobras Chief Executive Officer Maria das Gracas Foster’s requests for fuel-price increases in April and May, telling management that delivering on production targets would ease its financial difficulties, a person with direct knowledge of the talks said this month. Company officials expressed concern to Mantega that continued fuel price caps could result in a lower rating and higher credit costs, the person said.

The most-indebted publicly traded oil company has been subsidizing imported fuel since 2011 as part of a government policy to use price controls to slow inflation, which has exceeded the official 4.5 percent target throughout Rousseff’s term.

“A policy change would improve the economics of downstream,” Michael Roche, an emerging-market strategist at Seaport Group LLC, said by telephone from New York.

Petrobras is building new refineries to reduce imports and improve its return on capital, the company said in a June 2 e-mail. Its five-year business plan calls for a fuel-price alignment to improve leverage and shareholder returns.

Production Slide

The Rio de Janeiro-based producer sells imported gasoline at as much as a 20 percent discount to international prices, Palacios said. Subsidies have cost the company more than $31 billion in three years, Citigroup Inc. said in a May 22 research note.

Petrobras’s production has declined for two years in a row. It expects to boost domestic output 7.5 percent this year as it adds new offshore production units. Average output through April is little changed.

The fuel losses have coincided with a jump in investments as the company expands its capacity to produce and refine oil. A $24 billion cash-flow deficit in the past 12 months is the largest of any publicly traded oil company, according to data compiled by Bloomberg.

Petrobras shares have gained 49 percent since March 17 and bonds rallied amid speculation Rousseff will either be voted out of office in October and replaced with a more business-friendly administration, or start adjusting fuel prices after the elections.

“The pricing policy can actually cap the upside that you get from oil prices or higher production,” Palacios said.

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