Analysis: Could Petrobras cause divorce between Bolsonaro and the market?

RIO DE JANEIRO, BRAZIL – Among economists and analysts who believe that the latest news about Petrobras represents the divorce between the Bolsonaro government and the market, with turbulent times ahead, and those who believe in an impact more similar to “Joesley Day”, when the stock market slumped but soon recovered, all agree on one point: Monday, February 22nd, will be volatile, the stock market will be bearish and Petrobras and state-owned companies, mainly electric power companies, will see their share prices slump.

On Friday, after the appointment of General Joaquim Silva e Luna to replace Roberto Castello Branco as CEO of Petrobras, the EWZ, the main Brazilian exchange traded fund (ETF) traded in the American market, which replicates the MSCI Brazil index, fell 3.64% in the after market, the trading period after the regular market closing.

“Looking at what happened out there and considering that the EWZ is dollarized, I expect a 2% to 2.5% drop in the stock market this Monday, with all the state-owned companies greatly impacted, mainly Petrobras and Eletrobras [ELET3] – in addition to a 1% to 1.5% drop in the dollar,” says Pedro Lang, head of equities at Valor Investimentos.
An indication that the slump in the state-owned company should be sharp lies in Petrobras’ ADRs, depositary receipts traded on the New York Stock Exchange. The shares closed the after market with a drop of 9.55% on Friday night, February 19th, quoted at US$9.09.

On the B3, preferred shares had already closed Friday down 6.62%, driven by Bolsonaro’s statement that something would happen in the coming days, without specifying what it would be. Along with the 7.92% drop in common shares (PETR3, with voting rights), the market value of the state-owned company dropped from R$383 billion on Thursday, February 18th to R$354.8 billion on Friday, a R$28.2 billion slump.

Luiz Fernando Figueiredo, partner at Mauá Capital and former Central Bank director, says that the drop seen in the after market should be repeated in the regular trading session on Monday, but points out that the impact should be limited because the debate, for now, has not addressed fiscal premises.

“It’s just another yellow warning sign, pretty bad, no doubt, but it’s not the case of saying that the government has completely turned around. If it were a fiscal issue, it would be different. The situation of the state-owned companies has always been difficult, in Michel Temer’s government, which was more liberal, things like this happened. The indications are terrible, but with the fiscal aspect preserved, it is not something that will completely change the environment,” says Figueiredo.

Roberto Attuch Jr., Ohmresearch’s founder and CEO, has a more pessimistic perspective of the emerging scenario. “There are people comparing the current situation to ‘Joesley Day’, in the sense that they think that the stock market will plummet on Monday and in a month’s time no one will think about it anymore.”

“The government has in fact asked the market for a divorce, the market’s credentials vis-a-vis the government have been badly shaken. The immediate impact may not be as extreme as ‘Joesley Day’, but it will be more lasting,” Attuch adds.

After the appointment of General Silva e Luna, XP Investimentos downgraded from neutral to sell the recommendation of Petrobras’ shares. The target price was reduced from R$32 to R$24, both for common and preferred shares. In the report, analysts Gabriel Francisco and Maira Maldonado justify that the change of command jeopardizes Petrobras’ independence and the fuel price policy in line with international price references.

“While we can’t draw preliminary conclusions as to whether Petrobras’ pricing policy will change under Silva e Luna’s management, what matters is the message that is being conveyed to the market: it is becoming increasingly difficult politically for Petrobras to implement a policy in which fuel prices vary according to changes in the exchange rate and oil barrel prices (especially in the case of diesel), given truckers’ pressures,” say XP analysts.

Power companies are the next target

In addition to the change in the direction of Petrobras, the market should react to another statement by President Jair Bolsonaro. In a conversation with supporters on Saturday, February 20th, after saying he decided to remove Roberto Castello Branco because the readjustments in fuel prices this year were “cowardice,” the president promised to also intervene in the electric power market. “We will intervene in electric power, which is another problem too,” he said.

Luiz Fernando Figueiredo says that the combination of the change of command at Petrobras and the mention of electric companies, should lead the shares of all state-owned companies “to be greatly impacted”. “Public companies are always given a discount, because they are always bound to experience what happened to Petrobras. But the discount will increase because now it is no longer just a doubt, in practice firm political interference in a public company occurred. Now, will this extend to the others or not? From what it seems, the president said that it won’t be only Petrobras,” he says.

Lang, from Valor Investimentos, says that in addition to Petrobras – which may repeat a slump similar to Friday’s, of about 7% – the shares of Eletrobras and distributors, such as Cemig (CMIG4) and Light (LIGT3), should also experience sharp losses, contaminated by increased uncertainty about the electricity sector.

For Alex Agostini, chief economist at Austin Rating, markets will be “very nervous” on Monday, with impacts not only on the stock market, but also on interest and exchange rates. For him, the latest government signals go beyond the issue of Petrobras and electric power companies: they reach the debate on the privatization of companies, which was seen as one of the ways out of the country’s fiscal problems.

“At its inception, the Bolsonaro government made it clear that it was not in favor of privatization, but Minister Paulo Guedes insisted and he gave in. Now, we can be sure that Bolsonaro of the campaign period has changed. He was elected, changed his stance and the privatizations of Eletrobras, the Correios and other companies should be left behind,” says Agostini, adding that by abandoning the privatization agenda, the government increases the country’s fiscal risk. “If nothing is done about it, you can be sure that the market will worsen.”

Changes at Petrobras

Bruno Musa, partner at Acqua Investimentos, points out that General Joaquim Silva e Luna, Bolsonaro’s nominee to take over the presidency of Petrobras, has no experience in the oil and gas sector, which is why the market’s reaction is even worse: “Political interference is never well regarded by the market and investors are already reflecting this,” he says.

Adriano Pires, director and founder of the Brazilian Center for Infrastructure (CBIE) and one of the best known oil specialists in the country, adds that in addition to his lack of experience, the fact that Silva e Luna is a general should also not be well digested by the market.

“The market sees it as militarizing the company. And since Bolsonaro kept saying over the weekend that gasoline could be 15% cheaper, the question remains: will the general change Petrobras’ pricing policy? The general himself issued a negative statement when he said that ‘as president of Petrobras he has to take care of investors and Brazilians. In fact, he should say: ‘As president of Petrobras, I have to take care of investors and president Bolsonaro has to take care of Brazilians’,” Pires says.

However, the appointment of Silva e Luna needs to be approved by Petrobras’ board of directors, since Bolsonaro has no formal power to fire Castello Branco. The board, made up of members appointed by the government but who theoretically act independently, will meet on Tuesday, February 23rd, to discuss the change in command.

Sources close to the board say that the general’s name should be accepted by the members, despite the minority shareholder vote, which should be against the change of command.
Pires, from CBIE, also believes that the change should be approved. In his opinion, the change in command by itself does not represent a problem, but rather the way the president has been addressing the issue. “The market loves to add fuel to the fire, but it is overreacting, because Bolsonaro makes room for this and leaves doubts hanging. But changes in command happen. And the president of a state-owned company has to protect the interests of the majority shareholder, the government, he can’t just say ‘to hell with it’,” he says.

The founder of CBIE says that despite being respected by the market, Castello Branco was wrong to say that truckers were not a problem of the state-owned company. “In the Dilma government, Petrobras only watched over the interest of its majority shareholder, now Petrobras only watches over the interest of the private shareholder, and it’s not like that either. To reach a common denominator, the president of Petrobras has to deal with Petrobras and the president of the Republic with Brazilians, with policies such as the creation of a stabilization fund, which prevents the volatility of oil from affecting fuel prices and hindering the population in moments like the current one, of pandemic.”

The CEO of Ohmresearch, does not rule out the possibility of the board rejecting Silva e Luna’s nomination.

“There are many people who argue that the board should not accept it,” Attuch says. “It is in Petrobras’ Articles of Incorporation that any subsidy on fuel must be paid by the controller, the government. If they want to change the CEO because the government is not happy with the pricing policy, by not reappointing Castello Branco, would the board be doing its duty? The board has to do what is good for the company in the long run”, he adds.

He also says that “it is no overstatement to say that Petrobras has become uninvestable” and is in a “lose-lose” situation.

“Petrobras is not going to benefit from the rebound occurring in oil prices. And since it doesn’t have any strategy in renewables, it won’t win on other fronts either, so the medium-term argument is compromised,” said Attuch.

Agostini is also critical of the change of control at the company. “The repercussion is very negative. Certainly, on Monday, Petrobras’ shares will fall even more because it is clear that this decision is due to the fact that Petrobras has the federal government as its majority shareholder. But it is also a publicly-traded company, so it must please the market, it has to abide by compliance rules”, says Agostini.

Brazilian Securities and Exchange Commission

The appointment of General Silva e Luna should also be analyzed by Brazil’s Securities and Exchange Commission (CVM), the body that regulates the financial market. According to sources, the CVM is considering opening an administrative proceeding to investigate if the information on the change in the command of Petrobras was properly disclosed.
In a note, the body did not confirm the opening of the proceeding, but said it “analyzes information and activities involving publicly traded companies, taking appropriate measures,where necessary”.

In the same note, the regulator adds: “Notwithstanding, we suggest reading the communiqué to the market released by CVM, in which the authority alerts to the responsibilities of publicly traded companies in the disclosure/dissemination of relevant information.”

The text mentioned by the CVM refers to Instruction 358, which states that any announcement that may interfere with the share value of a listed company must be passed on to the market through the company’s institutional channels, as a material fact, before being disclosed. The CVM’s board clearly opposes Bolsonaro’s habit of releasing important news about the company through social networks.

Bolsonaro with an eye on the 2022 elections and Guedes weakened

For Attuch, the change at Petrobras makes it clear that Bolsonaro “began his 2022 campaign on Friday.” “What prompted the change at Petrobras was a purely political calculation by the president: he came to the conclusion that Petrobras’ pricing policy is inconsistent with his reelection plan. It’s as simple as that.”

The chief economist at Austin Rating agrees that the president’s recent attitudes have been entirely election-driven. “In 2018, Bolsonaro supported the truckers’ strike and then had strong support from truckers in his election. He is eyeing support from the teamsters in the 2022 election,” Agostini adds.

At the same event in Campinas where he spoke about changes in the electricity sector, on Saturday afternoon, Bolsonaro also said that the other swaps he mentioned during the day, about new changes in the government, will be weighty and will involve top management. “We are doing things, we are changing, we are improving. I am not afraid of change, no. Next week there should be more changes… And to me changing is not about little fish, no, it is about sharks”.

The president’s statements have raised doubts about the permanence of Paulo Guedes at the head of the Ministry of Economy. Sérgio Vale, chief economist at MB Associados, agrees that the change in command of Petrobras reinforces the view that Guedes is weakened and Bolsonaro is focused on reelection. “How will Bolsonaro react to this? The alternative of holding prices is known to the market and it will go very wrong. This also shows the weakness of Minister Guedes. In 2019 he managed to reverse this unwillingness, but not now. This all also exposes the challenges in managing the country over the next two years with a president focused on reelection,” says the economist at MB.

Agostini recalls that Roberto Castello Branco had been appointed by Minister of Economy Paulo Guedes. “Bolsonaro had wanted to change Castello Branco before, but Guedes persuaded him to keep him, mentioning the problems he would have if he changed the command of the state-owned company. The weakening of Guedes is another risk factor that should help sour the market’s mood,” he says.

Attuch also draws attention to another fact this weekend: Salim Mattar, Bolsonaro’s ex-secretary of privatization, said that the Minister is “resilient, but hasn’t realized he has been beaten.” “If Guedes is a liberal and the government says it’s going to intervene in energy and Petrobras, this is a clear sign that the Minister has become much weaker. So far he has not given any statement and whether or not he will stay is a personal matter, but Salim Mattar himself, who is very close to Guedes, says that he has been beaten,” comments Ohmresearch’s CEO

SOurce: InfoMoney

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