Petrobras
Two heads are worse than one
Brazil’s state-controlled energy giant, under Maria das Graças Foster, is paying dearly for meddling by Dilma Rousseff’s government
Apr 5th 2014
RIO DE JANEIRO
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“UNIQUE.” That is how Credit Suisse, a bank, sums up Petrobras. It has a point. Most companies’ stocks would sag on the sort of news Brazil’s oil giant has faced in the past three weeks. A federal investigation was opened, into alleged backhanders paid to its employees by a Dutch company in exchange for oil-platform and drilling contracts. (Both companies deny the allegations.) A parliamentary inquiry is imminent, into the purchase in 2006 of a refinery in Texas which cost $1.2 billion but is now worth no more than $180m. A former director has been arrested in a money-laundering probe. If that were not enough, on March 24th Standard & Poor’s, a ratings agency, downgraded its corporate debt. Yet Petrobras’s shares have risen by 30%.
The reason for this seemingly irrational exuberance is that investors consider Petrobras’s prospects to be inversely linked to those of Brazil’s government, led by the president, Dilma Rousseff. The rally began with rumours (later proved premature) that Ms Rousseff’s poll lead over her likeliest challengers in a presidential election this October was dwindling. The government owns a majority stake in the company and makes most of the strategic decisions over the head of Maria das Graças Foster, the chief executive.
These, the market feels, have been disastrous. The company is required by law to hire and buy parts from an inchoate local oil-services sector, leading to delays and cost overruns. It was told to build unviable refineries in the poor north-east to promote regional development. It is also the only principal operator allowed in vast, ultra-deep pré-sal (beneath the salt) fields discovered in 2006 off Brazil’s coast. This monopoly is a curse as well as a blessing: Petrobras is obliged to devote resources to the pré-sal that might be better employed elsewhere. Despite debt-fuelled investment of roughly $40 billion a year, production has flatlined at around 2m barrels a day (b/d) in the past three years.
Most damaging, says Adriano Pires, an energy consultant in Rio de Janeiro, “Petrobras is being misused as a tool of macroeconomic as well as industrial policy.” Since 2006 the government has capped petrol prices to curb inflation. Unable to meet rising domestic demand with what it produces, the company has to import petrol and diesel, which it must then sell at a loss. This has cost it an estimated 48 billion reais ($21 billion) in the past three years alone—and makes Ms Foster possibly the only oil boss in the world praying for lower petrol prices.
All this has left Petrobras overstretched and underperforming. It is the least profitable of the world’s big oil firms, reckons Credit Suisse. Its market value has fallen by almost half, from 405 billion reais shortly after a public share issue in 2010 to 209 billion reais today (see chart).
Hopes that Ms Foster, a career engineer and chum of Ms Rousseff’s, would turn the company around have proved forlorn. Widely regarded as clever and honest, she has done plenty of things right since taking the helm two years ago. The recent scandals pertain to events that predate her tenure. She replaced a management team dominated by political appointees with abler experts and returned some resources to maintaining mature fields, whose output suffered as attention turned to the pré-sal. She has also trimmed costs.
But Ms Foster’s “rough and authoritarian” manner has alienated the ranks and stifled critical thinking, says a former executive who used to work with her. With little room for cost-cutting in the heavily unionised, 86,000-strong workforce, she has tightened the screw on suppliers. “She is killing the supply chain,” laments the boss of a struggling medium-sized firm. Even small contractual claims can now take up to a year to resolve. That not only chokes suppliers but undermines Petrobras’s own operations, which rely on their products. It also contradicts the government’s loud support for local industry, remarks this boss.
Ms Foster’s main failure, however, was that she did not convince Ms Rousseff to let domestic petrol prices rise, says Wagner Freire, an oil expert and a retired director of Petrobras. Investors at first gave the untested Ms Foster the benefit of the doubt because they believed she had the president’s ear. Last October she seemed close, announcing that a transparent new price formula would be put in place. But she had to backtrack after herself getting an earful from Ms Rousseff.
Still, João Castro Neves of Eurasia Group, a risk consultant, thinks that the situation has reached a critical juncture. Domestic petrol prices will have to go up, regardless of who wins the election, he says, “as a matter of necessity, if not conviction”. Congress is rumoured to be considering the easing of local-content and lead-operator requirements in the pré-sal. If this happens foreign oil companies are likely to pile in, boosting the domestic industry which will cater to them. Mr Castro Neves believes the auction last year for the right to tap the Libra pré-sal field, which raked in $15 billion from a consortium of European and Chinese firms, was the last big concession deal on the old, stingier terms.
Petrobras has a lot going for it. It boasts reserves equivalent to 17 billion barrels, not counting the potential pré-sal riches which could be the world’s biggest. Last year it managed to install nine platforms at sea, a remarkable achievement, says Cristian Silva of Gaia Partners, an oil-services firm. Its pré-sal wells now pump 400,000 b/d, up from 70,000 b/d two years ago. In finding oil and getting it out of the ground, Petrobras is the second-most-lucrative among the oil giants, according to Credit Suisse. Investors still harbour hopes that it can reach its goal of doubling production to 4.2m b/d by 2020 (the company expects a 7.5% rise this year). An $8 billion debt issue in March was three times oversubscribed. Despite the ratings stumble, Petrobras retains investment grade.
Petrobras is unlikely ever to be a normal company. But with less political meddling it could be profitably unusual—perhaps even unusually profitable.
“UNIQUE.” That is how Credit Suisse, a bank, sums up Petrobras. It has a point. Most companies’ stocks would sag on the sort of news Brazil’s oil giant has faced in the past three weeks. A federal investigation was opened, into alleged backhanders paid to its employees by a Dutch company in exchange for oil-platform and drilling contracts. (Both companies deny the allegations.) A parliamentary inquiry is imminent, into the purchase in 2006 of a refinery in Texas which cost $1.2 billion but is now worth no more than $180m. A former director has been arrested in a money-laundering probe. If that were not enough, on March 24th Standard & Poor’s, a ratings agency, downgraded its corporate debt. Yet Petrobras’s shares have risen by 30%.
The reason for this seemingly irrational exuberance is that investors consider Petrobras’s prospects to be inversely linked to those of Brazil’s government, led by the president, Dilma Rousseff. The rally began with rumours (later proved premature) that Ms Rousseff’s poll lead over her likeliest challengers in a presidential election this October was dwindling. The government owns a majority stake in the company and makes most of the strategic decisions over the head of Maria das Graças Foster, the chief executive.
These, the market feels, have been disastrous. The company is required by law to hire and buy parts from an inchoate local oil-services sector, leading to delays and cost overruns. It was told to build unviable refineries in the poor north-east to promote regional development. It is also the only principal operator allowed in vast, ultra-deep pré-sal (beneath the salt) fields discovered in 2006 off Brazil’s coast. This monopoly is a curse as well as a blessing: Petrobras is obliged to devote resources to the pré-sal that might be better employed elsewhere. Despite debt-fuelled investment of roughly $40 billion a year, production has flatlined at around 2m barrels a day (b/d) in the past three years.
Most damaging, says Adriano Pires, an energy consultant in Rio de Janeiro, “Petrobras is being misused as a tool of macroeconomic as well as industrial policy.” Since 2006 the government has capped petrol prices to curb inflation. Unable to meet rising domestic demand with what it produces, the company has to import petrol and diesel, which it must then sell at a loss. This has cost it an estimated 48 billion reais ($21 billion) in the past three years alone—and makes Ms Foster possibly the only oil boss in the world praying for lower petrol prices.
All this has left Petrobras overstretched and underperforming. It is the least profitable of the world’s big oil firms, reckons Credit Suisse. Its market value has fallen by almost half, from 405 billion reais shortly after a public share issue in 2010 to 209 billion reais today (see chart).
Hopes that Ms Foster, a career engineer and chum of Ms Rousseff’s, would turn the company around have proved forlorn. Widely regarded as clever and honest, she has done plenty of things right since taking the helm two years ago. The recent scandals pertain to events that predate her tenure. She replaced a management team dominated by political appointees with abler experts and returned some resources to maintaining mature fields, whose output suffered as attention turned to the pré-sal. She has also trimmed costs.
But Ms Foster’s “rough and authoritarian” manner has alienated the ranks and stifled critical thinking, says a former executive who used to work with her. With little room for cost-cutting in the heavily unionised, 86,000-strong workforce, she has tightened the screw on suppliers. “She is killing the supply chain,” laments the boss of a struggling medium-sized firm. Even small contractual claims can now take up to a year to resolve. That not only chokes suppliers but undermines Petrobras’s own operations, which rely on their products. It also contradicts the government’s loud support for local industry, remarks this boss.
Ms Foster’s main failure, however, was that she did not convince Ms Rousseff to let domestic petrol prices rise, says Wagner Freire, an oil expert and a retired director of Petrobras. Investors at first gave the untested Ms Foster the benefit of the doubt because they believed she had the president’s ear. Last October she seemed close, announcing that a transparent new price formula would be put in place. But she had to backtrack after herself getting an earful from Ms Rousseff.
Still, João Castro Neves of Eurasia Group, a risk consultant, thinks that the situation has reached a critical juncture. Domestic petrol prices will have to go up, regardless of who wins the election, he says, “as a matter of necessity, if not conviction”. Congress is rumoured to be considering the easing of local-content and lead-operator requirements in the pré-sal. If this happens foreign oil companies are likely to pile in, boosting the domestic industry which will cater to them. Mr Castro Neves believes the auction last year for the right to tap the Libra pré-sal field, which raked in $15 billion from a consortium of European and Chinese firms, was the last big concession deal on the old, stingier terms.
Petrobras has a lot going for it. It boasts reserves equivalent to 17 billion barrels, not counting the potential pré-sal riches which could be the world’s biggest. Last year it managed to install nine platforms at sea, a remarkable achievement, says Cristian Silva of Gaia Partners, an oil-services firm. Its pré-sal wells now pump 400,000 b/d, up from 70,000 b/d two years ago. In finding oil and getting it out of the ground, Petrobras is the second-most-lucrative among the oil giants, according to Credit Suisse. Investors still harbour hopes that it can reach its goal of doubling production to 4.2m b/d by 2020 (the company expects a 7.5% rise this year). An $8 billion debt issue in March was three times oversubscribed. Despite the ratings stumble, Petrobras retains investment grade.
Petrobras is unlikely ever to be a normal company. But with less political meddling it could be profitably unusual—perhaps even unusually profitable.
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