Petrobras Fuel Sales in Brazil Ease Pain From Global Oil Plunge

  • Refining unit posts 4.6 billion-real profit vs. loss year-ago
  • Currency slump boosted costs of debt denominated in dollars

Petroleo Brasileiro SA’s ability to raise fuel prices in Brazil while they dropped everywhere else has softened the blow of the oil crash and a currency slump.

The state-controlled oil producer’s near-monopoly on gasoline and diesel distribution allowed it to profit from imports of cheaper fuel from other countries. As a result, its third-quarter net loss narrowed by almost a third and its operating profit before items almost doubled.

The gains from selling fuel have been a respite for the beleaguered oil producer that has failed to meet output targets and has been mired in a corruption scandal that riveted the country and led some of its suppliers to seek bankruptcy protection. The company is slashing investments and selling assets to reduce the biggest debt load in the oil industry, and its credit rating was downgraded to junk in September.

“Given the state of the global oil market, the recent oil price weakness, and the behavior of the Brazilian real this year, Petrobras’s third-quarter results appear to me quite positive,” Rafael Elias, the head of emerging-market strategy at Cantor Fitzgerald, said in an e-mail.

Gasoline Premium

Petrobras sold gasoline at a 19 percent premium to imports following a price increase in September, brokerage Planner Corretora said in a note to clients before the results.

The Brazilian real’s 21 percent decline in the quarter weighed on the company’s results as most of Petrobras’s revenue comes from domestic sales while the majority of its debt is denominated in dollars, causing borrowing costs to surge when the real weakens. Financial expenses almost tripled to 6.4 billion reais, from 2.3 billion reais a year earlier, largely because of those higher borrowing costs.

“The financial problems it has are mainly from its debt,” Lucas Brendler, an analyst at Geracao Futuro Corretora in Porto Alegre, Brazil, said in a phone interview before the results were released. “With the currency flying around like we’ve seen in the last 12 months, it’s very complicated.”

The Rio de Janeiro-based company had a net loss of 3.8 billion reais ($1 billion) in the third quarter, compared with a loss of 5.3 billion reais a year earlier, according to a statement after markets closed Thursday.

Operating Profit

Earnings before interest, taxes, depreciation, and amortization, or Ebitda, rose to 15.5 billion reais, from 8.18 billion reais a year earlier. Sales dropped to 82.2 billion reais from 88.4 billion a year earlier.

“We are very happy with the results so far, but we are vigilant,” Chief Financial Officer Ivan Monteiro told reporters in Rio.

Petrobras executives are planning to travel to countries including the U.S., China, Mexico, Canada and the U.K. to meet with “strategic investors” as part of an effort to raise more than $15 billion from asset sales before the end of 2016, Monteiro said.

Petrobras, which imports gasoline because it doesn’t produce enough to meet demand in Latin America’s biggest economy, had posted huge losses at its refining division until late 2014 for selling the fuel at a discount as part of a government policy to contain inflation.

Fuel Gains

This year, the fuel division has been a source of gains. The unit posted a 4.6 billion-real profit for the quarter, compared with a 11.8 billion-real loss a year earlier.

But while higher fuel prices improved refining margins, demand for gasoline and diesel has slowed as Brazil is estimated to be going through its worst recession since the Great Depression. The decline in oil prices reduced revenue from the company’s crude exports.

Petrobras began accounting practices in 2013 that allow exporters to reduce the effect of currency fluctuations on earnings. Still, the so-called hedge accounting only protects about 70 percent of its foreign currency obligations, brokerage Planner Corretora said in a note to clients before the results.

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