Petrobras Jumps as Surprise Price Increase Seen Lifting Cash

Updated on
  • First time Petrobras raises fuel prices in almost a year
  • Move should help offset impact of weaker exchange rate

Petroleo Brasileiro SA, the world’s biggest junk-rated borrower, surprised investors with a fuel-price increase, triggering a record bond rally and the biggest stock gain in seven months.

Petrobras, as the state-run company is known, said in a statement it will raise prices charged at its refineries by 6 percent for gasoline and 4 percent for diesel starting Wednesday, its first price increase since November 2014. The move should add 6.9 billion reais ($1.7 billion) to annual earnings before interest, taxes, depreciation and amortization, or Ebitda, Bank of America said in a note to clients.

Higher fuel prices will provide much-needed cash flow as the Rio de Janeiro-based producer slashes investments and pays more to service its dollar-denominated debt after the local currency tumbled 33 percent this year, the most among major tenders worldwide. At the same time, a sweeping corruption probe has all but paralyzed some projects and a rout in oil prices has eroded revenue.

“It should help to limit concerns that the effect of a weak currency on Petrobras’s cash-flow generation could go unchecked and cause further deterioration in an already weak financial situation,” Bank of America analysts Frank McGann and Vicente Flanga said in the report.

Shares surged as much as 10 percent, the biggest intra-day gain since February, and were trading 8.2 percent higher at 7.13 reais at 11:10 a.m. in Sao Paulo. The company’s $2.5 billion in bonds due in March 2024 climbed 8.2 percent to 71.58 cents on the dollar, the largest increase since the debt was issued in March 2014.

The move underscores the policy shift under Chief Executive Officer Aldemir Bendine. Government-controlled Petrobras lost tens of billions of dollars by keeping prices low and subsidizing fuel imports during the crude boom from 2011 to 2014 as part of a wider effort by policy makers to control inflation. When Bendine took over in February, he vowed to limit government interference.

BBVA economist Enestor dos Santos raised his estimate for Brazil inflation in 2015 to 9.5 percent from 9.2 percent, citing the Petrobras fuel price increase.

“The government showed that it realized how dramatic Petrobras’s situation is,” said Adriano Pires, the head of Rio de Janeiro-based energy and infrastructure consultant CBIE.