Brazil Petrobras is center of attention with diesel price hike, Moody’s rating, and privatization

RIO DE JANEIRO, BRAZIL – This week began hectic for Brazilian oil giant Petrobras. On Tuesday, the company announced a diesel price increase of nearly 9% after holding down the price of the fuel for over 80 days, while Moody’s upgraded the company’s rating yesterday afternoon from “Ba2” to “Ba1.”

Earlier on Monday, Minister Paulo Guedes said that ideally the company should be privatized within a 10-year time frame.

The increase in diesel on Tuesday came after the company’s president Joaquim Silva e Luna advocated the current model of fuel pricing in Brazil and signaled that he would increase the fuel price. Although diesel has been maintained without readjustments, gasoline has experienced consecutive hikes.

The executive on Monday publicly addressed President Jair Bolsonaro, who has criticized the current prices charged by the company’s refineries. Two weeks ago, Silva e Luna was invited by the Chamber of Deputies to explain Petrobras’ pricing policy.

As it still holds the monopoly on refining in Brazil, Petrobras has a full impact on prices, as distributors cannot escape its influence, even if they decide to buy from fuel importers. This is because importers pay even more, as the price charged by Petrobras is lower than the international rate.

Despite the criticism Petrobras receives from the government and certain sectors of society, such as truckers, it charges less for fuel than what is being charged internationally. This worldwide surge occurred mainly due to the rise in the crued oil price after the rebound of most economies in this second year of the pandemic.

For SFA Investimentos analyst Rafael Chacur, the end of the refining monopoly, which is in progress with the sale of refineries, may help reduce the pressure from society, groups and politicians on the company’s pricing policy.

“With the exit of Petrobras from the refining park, the political risk on the pricing policy is removed somewhat because half of the park would be owned by private capital. The company would not be expected to pay a very low price by itself,” he explains.

According to the SFA analyst, before Wednesday’s readjustment Petrobras sold diesel at about 15% less than the international price. So, despite the readjustment, there is still a gap of about 7%.

On Twitter, Chamber of Deputies president Arthur Lira said Tuesday that Brazil cannot afford gasoline at R$7 (US$1.29) per liter (almost $5 per US gallon) and that the issue will be discussed at a meeting of the Chamber’s group of party leaders.

Ilan Arbertman says that the two paths signaled to guarantee some stability for both gas and gasoline are complex. “There have been talks for some time in the field of gasoline, there was talk about the possibility of creating a stabilization fund, and of subsidizing gas. So, there are two specific paths, but they are extremely complex and have not progressed.”

MOODY’S RAISES ITS RATING

Tuesday afternoon’s announcement that Moody’s upgraded the company’s rating from “Ba2” to “Ba1” may even serve as a way for the company to gain more arguments to defend its current pricing strategy.

Despite the coincidence, the rating increase has no direct connection with Tuesday’s decision to raise diesel.

According to Moody’s, the improved rating is related to a solid financial performance of post-Lava-Jato recovery, since the management of Pedro Parente, during the Temer government, when the company decided to give up investments with low yields, focus on pre-salt and reduce debt.

PETROBRAS PRIVATIZATION

According to Minister of Economy Paulo Guedes, 10 years is a good time frame to privatize companies like Petrobras and Banco do Brasil.

On Monday, while fuels were the topic, the Minister of Economy decided to talk about the company’s privatization, while taking part in an event promoted by the International Chamber of Commerce-ICC Brazil.

However, Guedes did not establish a relationship between the company’s sale and the fuel prices issue, but cited privatization as something he believes Brazil needs.

According to analyst Rafael Chacur, the current scenario has provided Petrobras with a market context and privatization is not something essential.

“To say that Petrobras needs to be privatized for a better pre-salt exploration doesn’t make much sense. Since Pedro Parente [former president of the company] it has had a strategy to ensure shareholder return, dividends, reduction of leverage and the plan to focus on more profitable assets, leaving shallow waters and selling part of its refining park. This makes room in the budget to invest in the pre-salt wells.”

“So, there is no need for privatization to exploit its full potential, considering the current business plan. The problem would arise in the case of a populist turn of events wanting to change everything there. In practice, a current strategic plan would not have as much impact in itself. There would be less political risk and less noise, but for the market it is already heading towards an open scenario, despite being a state-owned player,” he explains.

The analyst believes that a privatization would reinforce the idea of “freeing” the government with respect to fuels. The government would also have less power over inflation.

Ativa Investimentos analyst Ilan Arbetman points out that it is important to consider the scenario the company will face in the coming years.

“There are many ways for the company to face the energy transition process that is currently underway in the world. It has recognized this. The company knows that demand for oil in this decade will be lower, but the difference is that it has been unable to invest in the green agenda. Nowadays, much due to the negative legacy it had, Petrobras is in a reconstruction stage,” he says.

Ilan says he is against “strong opinions” in the sense of privatizing Petrobras. For him, it is also worth recalling that Eletrobras first figured on the list of companies to be privatized in the 1990s and this should only occur in 2022.

In other words, by talking about privatizing Petrobras 10 years from now, Paulo Guedes may be referring to something in an even longer time frame.

“From the shareholder’s perspective, there would be more profitability for investors if the privatization were to come, but it is something very complex and that needs studies, not least because Petrobras’ stakeholders are many, they are virtually all Brazilians. On the financial front, I have no doubt that there would be better results if the company were profit-oriented, but we can’t say for sure that this is the best way forward,” he says.