Petrobras shares fall, analysts point to poor management by Brazil


When Brazil’s state-run oil company raked in $70 billion in a 2010 public offering, leaders here called it evidence of the nation’s rising economic power.

“It wasn’t in Frankfurt. It wasn’t in London. It wasn’t in New York. It was here in São Paulo,” then-President Luiz Inácio “Lula” da Silva said of Petróleo Brasileiro’s stock sale, a record at the time. “Petrobras is an extraordinary triumph for Brazil’s achievement.”

Less than four years later, Petrobras looks more like a political black eye for Lula’s successor, Dilma Rousseff, and for Brazil’s image as a fast-growing emerging market.


Shares of Petrobras have tumbled, the company has struggled to increase oil production, and management has been ensnared in political scandals.

Many market analysts blame the problems on the government of Rousseff, the technocratic former minister of Energy who took over as president in 2011, and on the particular type of state control exercised over Petrobras in recent years.

Some investors appear to have been trading on the hope that Rousseff will lose her bid for reelection in October: Share prices have jumped as polls show her popularity waning.

Even if Rousseff, a former Petrobras chairwoman, ends up winning, many analysts believe Petrobras’ current problems could lead to shifts in the way Brazil runs the world’s seventh-largest economy.

Investors view Petrobras — Brazil’s largest company and the firm most associated with Brazil’s model of state-led development — as a key bellwether for the nation at large.

“Petrobras is the main entranceway to Brazil’s capital markets,” said Joao Augusto de Castro Neves, a political analyst at Eurasia Group in Washington. “If the markets see Petrobras with less enthusiasm, that impacts the view markets have more broadly towards Brazil.”

A big reason for the general malaise in the otherwise profitable Petrobras, analysts and investors said, is that the government charged the company with a number of strategic tasks — such as controlling inflation and developing other local industries — in addition to its basic business of extraction and production of oil.

As the economy slowed, the added responsibilities have proved more expensive, difficult and time-consuming than expected.

“You can argue that it’s good public policy to use oil to develop local industry, or to control oil prices at times,” said Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York. “But that should be paid for out of the government budget. The current model has overburdened the company and slowed development.”

Petrobras, in which the government owns a 51% stake, has long been seen as the best-run of Latin America’s major state oil companies, miles ahead of Mexico’s Pemex and Venezuela’s PDVSA. International market analysts praised its technical capacity and relative political independence.

It produces 91% of Brazil’s oil and 90% of its natural gas — and isn’t hurting for sales or profits, though neither have grown much recently. It earned $2.3 billion in the first three months of this year, slightly below its average for the previous four quarters. And its quarterly revenue of $34.5 billion has been generally flat over the period.

The company’s stock, despite climbing recently, remains 35% below prices at the start of 2011 when Rousseff took office. The iBovespa, the key Brazilian stock index, dropped 41% in the same period. It tends to rise and fall with the fate of Petrobras because of the company’s size and weight in the index.

Also troubling was that the company’s long-term debt swelled to $126.5 billion by the end of March, from $90.6 billion a year earlier.

Much of the political discussion since 2010 has been around new government rules over so-called pre-salt oil reserves — those that lie below a deep layer of salt and rock.

The discovery of the reserves appeared to be a huge asset for Petrobras in 2010 and a jewel in the crown of Lula, whose left-leaning government had overseen the rise of millions out of poverty and won the right to host the 2014 World Cup and 2016 Olympics.

A major component of the new rules for pre-salt exploration, however, was a provision that required Petrobras to use tankers, platforms and other infrastructure built in Brazil.

The aim was to develop a local petro industry similar to ones praised in Canada and Norway. But the rules slowed development, making foreign investors impatient. The rules also hindered the company’s ability to bid for new projects.

At the same time, the company bled cash as the government had decided to use Petrobras to keep down inflation, which has hovered near the government’s upper limit of 6.5% during much of Rousseff’s term.

Petrobras does not yet produce enough oil to meet local demand, so it must purchase fuel on the international market. But management, which answers to the government, has agreed to sell that oil at a loss in Brazil to help the government control inflation.

The company has made clear that, in the long term, it wants to charge prices that match the international market.

“We reiterate that aligning the prices is a permanent goal of the company,” Petrobras said in a written statement.

Even though the company has been hurt by its own lackluster financial results — along with a weak global economy that has prompted some investors to pull out of Brazil — Petrobras said it still expects a 7.5% jump in its oil output this year. That may signal a return to a more positive outlook.

In the meantime, the company has become a political football.

“We’re heading into a very tough year in terms of political and economic head winds, and there’s definitely going to be tension around Petrobras as we approach the election,” said analyst Castro Neves. “The company’s image has been tarnished in recent years, but there may be light at the end of the tunnel. The proven reserves are there.”

Adding to the economic pressures on Brazil and Petrobras are several company scandals that have dominated political headlines in recent months.

At the end of April, the Federal Senate launched an investigation into accusations that Petrobras drastically overpaid for an oil refinery in Pasadena, Texas, in 2006. And prosecutors opened a criminal investigation a month earlier into allegations the company accepted bribes from a Dutch supplier.

For the Pasadena refinery, Petrobras initially paid $360 million for a 50% stake and, six years later, was forced under contract to buy the rest, raising the total price to $1.2 billion. The company so far has written off more than $500 million on the deal.

In the Netherlands case, prosecutors are looking into claims that Petrobras employees took $139 million in bribes for steering oil platform and drilling contracts to the Dutch company SBM Offshore.

Petrobras’ current chief executive, Maria das Graças Silva Foster, recently has been spending her time firefighting such scandals. Foster, who took the reins two years ago, was secretary for Oil, Natural Gas and Renewable Fuels under both Lula and Rousseff.

“The scandals indicate either that there was some corruption or, at least, some bad management in the past,” said analyst Volpon at Nomura Securities. “And they affect the company now, because it’s not easy for poor Graças Foster to run the company if she has to keep showing up at the government to explain herself.”