(Bloomberg) — In the past four years Brazil’s state-owned oil company Petrobras has gone from the world’s most indebted oil producer to showering profits on investors. A controversy over fuel prices on Brazil’s campaign trail is signaling the good times may not last.
Rising pump prices are angering voters. Former president Luiz Inacio Lula da Silva, who’s the frontrunner to be elected Brazil’s next leader in October, is proposing the company offer fuel at below-market prices that previously impoverished the oil giant. That’s what happened between 2011 and 2015, when Lula’s left-wing Workers’ Party was in power.
A return to such policies could mean cheap gasoline for Brazilian consumers, but also a halt to the robust dividends Petrobras has been paying out. Shares hit session lows earlier this month after Lula said the company shouldn’t sell fuel that’s pegged to higher, international prices to enrich investors.
“There’s a lot of value to be extracted in the next 12 months and we have exposure to Petrobras, but we’ve hedged our long position in the stock so we can defend any potential drop,” said Andre Caldas, a Sao Paulo-based portfolio manager at Clave Capital. “It’s an election year after all.”
Cheap Valuations
Since the Workers’ Party lost power in 2016, two pro-business administrations have transformed Petrobras into a leaner, more profitable outfit. Under a chief executive officer appointed by Jair Bolsonaro, the socially conservative incumbent who has consistently trailed Lula in the polls, the company is selling fuel at international prices — and oil is soaring. It also cut staff and downsized less profitable divisions like refining and biofuels.
Investors have flocked to the company, lured by the promise of massive dividend payments. Shares are up 11% this year.
There are reasons to stick with the stock despite election-year concerns. Petrobras’s price-to-earnings ratio is only a fraction of U.S. and European competitors, and lower than its Russian and Chinese state-controlled counterparts. It’s also well positioned to take advantage of higher oil prices because it has continued to develop giant deep-water fields during the pandemic.
Still, it’s not just fuel pricing policy that’s a concern under a Lula administration. He could also force Petrobras to build new refineries that don’t make economic sense, said Daniel Sensel, a New York-based investment analyst at Emso Asset Management. Guilherme Mello, an economic adviser to Lula, told Bloomberg in an interview that if Petrobras had more refining capacity it wouldn’t have to rely on expensive fuel imports that are stoking inflation.
“It seems more likely than not that this way of management is going to change,” Sensel said. Petrobras wouldn’t “be as independent.”
Buy Rating
Goldman Sachs is keeping its ‘buy’ rating on Petrobras despite Lula’s fuel price talk. Even if the company ramps up refining investments and sells fuel below international parity to give consumers relief, at worst it would erase the company’s free cash flow, instead of turning it negative like what happened a decade ago, the bank said in a Feb. 2 research report. Petrobras’s board would also have to change bylaws designed to prevent the government from setting fuel prices, the bank said.
While Bolsonaro has also heavily criticized Petrobras’s pricing policy, he has stopped short of intervening at the state-run company. Chief Executive Officer Joaquim Silva e Luna has pledged to continue tracking international rates.
“It’s hard to predict what Petrobras’s fuel policy will look like from 2023 onward, with Lula signaling he would make some changes,” said William Leite, founder and portfolio manager at Helius Capital. “But until then, it will have paid so much dividends, returning so much capital to holders, that that is enough to offset all of these risks,” said Leite, who owns Petrobras shares.
Brazil Energy Insight 
Leave a comment