Petrobras Mind The Gap – The sudden change in management led to a number of defections from the company’s board and management team.
(Bloomberg) — A general close to Brazilian President Jair Bolsonaro is poised to take control of Brazil’s state-controlled oil giant in a leadership shakeup that has spooked investors.
Petrobras Mind The Gap
With the government holding the majority of voting rights, Joaquim Silva y Luna was appointed to the board of Petroleo Brasileiro SA at a shareholders meeting on Monday, a formal step before being named CEO. Carlos Alberto de Oliveira, head of exploration and production, will be interim CEO until the board chooses a replacement, Petrobras said in a statement.
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Luna must navigate the conflicting priorities between Bolsonaro, who wants the company to do more to protect consumers from rising fuel costs, and investors who want market-based pricing to reduce debt and pay dividends The specter of increased government intervention in the producer based in Rio de Janeiro has made the oil company worse this year.
Investors are waiting for the Luna team to be assembled to assess whether the company will prioritize political concerns over the bottom line.
The fuel subsidies risk derailing Petrobras’ efforts to sell a group of refineries, a key source of financing to develop the giant South Atlantic oil fields that are the basis for the company’s future growth and profits. More competition in refining will make it more difficult for the authorities to intervene in the price level.
“Without the divestment program, they will have to find alternatives or reduce investment,” said Marcelo de Assis, head of upstream research in Latin America at consultancy Wood Mackenzie Ltd.
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Bolsonaro began lashing out at outgoing CEO Roberto Castello Branco in February over rising fuel prices and decided not to renew his mandate. The chief, a champion of the free market who won praise from investors for successfully guiding the oil producer through the pandemic and strengthening its finances, underwent a long and often difficult swan song before being formally removed from the council on Monday.
Castello Branco continued its policy of market-based fuel prices despite the president’s criticism. Last week, Bolsonaro rebuked the company for rising natural gas prices, sending shares lower and prompting Petrobras to seek clarification from the energy ministry about what the president meant.
In his most recent earnings call with analysts last month, the executive wore a “Mind the Gap” T-shirt in a reference to how Petrobras has improved its performance compared to other major oil companies during his tenure.
Recent Petrobras events underscore that rising crude oil prices are a mixed blessing for many oil companies in developing countries, often leading to costly subsidies. Mexico seeks to control prices, and Argentina’s YPF SA has capital and price controls in place. Also in Colombia, a country with a stronger history of pro-business policies, state-controlled Ecopetrol recently agreed to buy a state-owned energy company for $4 billion in a deal that unnerved the market.
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“It’s a Goldilocks scenario for oil prices in Latin America,” said Bloomberg Intelligence analyst Fernando Valle. “$100 oil would be good, but it’s actually harmful because of inflation and then governments make bad decisions like price controls.”
The sudden leadership change led to a series of defections from the company’s board and management team, undermining Petrobras’ governance at a time when environmental, social and governance, or ESG, practices are a growing priority among investors. One of the outgoing board members, Omar Carneiro da Cunha, said in a March 2 statement that he resigned due to “management practices.”
While ESG funds are not targeted at emerging markets, Petrobras is in 31 ESG funds worldwide, including the DFA Emerging Markets Core Equity Portfolio, the largest of such funds, according to data compiled by Bloomberg.
Some investors see room for improvement after Petrobras shares have fallen 16% this year. An increase of more than 20% in the price of global benchmark oil this year and the weakening of the Brazilian real should help Luna to keep the company profitable, said Eduardo Morais, fund manager of Claritas Investimentos of Principal Financial Group in Sao Paulo.
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“One of his main skills will be not to screw things up,” said Morais, who increased his stake in Petrobras after the stock tumbled in February. “The company is expected to generate a lot of money.”
The replacement of Petrobras’ CEO over disagreements with the Brazilian government over fuel prices remains an overhang for the company, even as operations improve. The results should benefit from the higher prices of raw materials and the simplification of operations, which has led to a significant reduction in costs. This could be prevented under new leadership if fuel price changes are removed to control Brazil’s inflation.
Brazil’s securities regulator has at least four separate investigations into how the CEO change was revealed and the possible use of privileged information. The company’s image was also tarnished by a member of the outgoing CEO’s team. The head of human resources was fired for inappropriate stock trading during Castello Branco’s fallout with Bolsonaro, the company said on March 29.
The turmoil in Petrobras comes at a time when Bolsonaro is on the defensive for his ineffective response to the pandemic and the slow pace of vaccinations. He overhauled his entire cabinet last month, underscoring the makeshift nature of the government now.
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“The worst thing about the government is that it is essentially placed to do the bidding of the government, and not for the minority shareholders,” said Valle of Bloomberg Intelligence.
Generated by readers, the comments included here do not reflect the views and opinions of . All comments are subject to editorial review. Off-topic, inappropriate or offensive comments will be removed. Petroleo Brasileiro SA (NYSE: PBR) is the largest Brazilian company and the 7th largest integrated oil company in the world. During the last two years, Petrobras paid its shareholders with dividends, which attracted a lot of attention not only among investors, but also among politicians. Since the beginning of the presidential campaign in Brazil, Petrobras has been at the center of criticism because of its high profits in the last two years and dividend payments. Shares have sunk more than 22% from their mid-October highs, which were more than $20 billion in market capitalization. The fear of negative economic developments under the new president, especially the end of the proposed privatization, cast a negative light on the actions of Petrobras. Petrobras seemed good on a fundamental basis, but for investors it is not enough to close the valuation gap.
With its daily production of 2,239 BOEPD (barrels of oil equivalent per day), Petrobras is the seventh largest integrated oil company in the world. However, the assessment tells us a different story. Petrobras trades at a significant discount to its competitors. If you take the average multiple in the peer group, and adjust it for Saudi Aramco (trading in its own league) and US companies (still trading at a premium), you get an adjusted EV/EBITDA multiple of 2.9x. Petrobras trades at 2.2x EV/EBITDA, which is a 23% discount to the peer group average. Anecdotally, this discount corresponds to the drop in the price of shares since mid-October. I can argue that this discount is what investors use as a margin of safety given political risks on the horizon. Closing this valuation gap will depend on clear political goals for the government and management of Petrobras going forward, and it will take some time.
Looking at the development of performance and investment since 2012, there are two observations. First, the profits generated in 2021 and 2022 are above average and probably at the peak of the cycle. Second, the high profits are the result of the heavy investments made from 2012 to 2015. Since then, the investments have slowly decreased and in 2022 they were only at the level of 7.7 billion US dollars. Lower investments in recent years equate to a decrease in CAPEX throughout the oil industry, and there is no reason to blame Petrobras for that. But if Petrobras wants to maintain BOE production at the current level, increased investment will be required. Either way, future profits will be lower.
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A similar trend is visible with dividend payments. While the highest dividend payment during the last ten years was $3.7 billion obtained in 2014, the dividends paid in 2021 and 2022 are respectively $13.5 billion and $41 billion. In addition, 2022 dividends are higher than expected FY22 net income of approximately US$5.5 billion. Dividends in excess of 30% are attractive, but in my view they are unsustainable. The company’s dividend clearly limits the flexibility of the future budget, especially at a time when the new president announced that Petrobras should be more active in the domestic production of fertilizers, refining and renewable energy. These businesses are businesses with lower margins compared to oil exploration and production. These trends lead to lower profitability, higher debt levels and necessarily lower dividends. Considering these facts, it is not surprising why there has been so much bad blood between the management of the company and the Brazilian political leaders. In the last two years, Jair Bolsonaro has actually fired three administrators. The new CEO Caio Paes de Andrade is given a difficult task to manage the company in uncertain waters and
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