Petrobras Concerns Despite Q4 Surge

By Andrew Willis, Senior Contributing Reporter

RIO DE JANEIRO, BRAZIL – Government-imposed price caps on fuel sold in Brazil continue to cause difficulties for state-led oil firm Petrobras, despite a surge in income during the fourth quarter of 2012. Chief executive Maria das Graças Foster has reportedly warned the government that rising debt levels, linked to the cap on fuel prices, could threaten the firm’s investment grade credit rating.

Unless gasoline and diesel prices are increased, debt levels at Petrobras will rise well above the company’s internal target, Foster said in a meeting with Brazil’s finance minister Guido Mantega, according to the Estado de São Paulo newspaper last Saturday, February 9th.

Foster reportedly told Mantega that company debt could reach 3.5 times earnings before interest, taxes, depreciation and amortization, or EBITDA, by the fourth quarter of this year. The firm’s internal target is 2.5 times EBITDA. A credit rating below investment grade would force many funds to pull out of Petrobras, harming the company’s ability to raise capital.

Mantega is also chairman of the Petrobras board. Last month the Brazilian government sanctioned a moderate rise in gasoline and diesel prices, taking effect from January 30th. These fell below analyst predictions of what is necessary, however, with the government fearful that higher fuel prices could cause a rise in inflation, traditionally a bugbear for administrators in Brazil.

Petrobras’s debt problems partially stem from the failure of the company’s refineries to keep pace with the fuel demands of Brazil’s growing economy, forcing the company to increase fuel imports that are subsequently sold on the domestic market at a loss.

Despite the difficulties, profits in the fourth quarter of 2012, published earlier this month, totaled R$7.75 billion (US$3.9 billion), 53 percent higher than in the same period in 2011. Much of this gain came from the sale of government bonds, however. For 2012 as a whole, net profits were R$21.2 billion, 36 percent below 2011.

Flagging crude oil production also hit profits, an issue likely to continue this year conceded Foster in a note to shareholders that accompanied the financial figures.

“In 2013, it’s possible that we will only reach the same level of crude oil production as in 2012,” Foster said. “I’m convinced of the excellent prospects for the company in the mid and long term,” she added.

Petrobras produced an average 1.98 million barrels of crude oil per day in 2012, down two percent from 2011.

A series of maintenance shutdowns to enable work on aging offshore oil platforms will continue to hit output in the first half of 2013, although six new platforms will come onstream in the second half of the year.

Petrobras is in the midst of a US$224 billion investment plan through to 2016, with much of the cash earmarked for the pre-salt region off the Brazilian coast. Announced to the world in 2007, the deepwater reserves are estimated to hold over fifty billion barrels of oil.

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