Price Controls Deal a Damaging Blow to Petrobras



Shares of Petrobras (NYSE:PBR) fell as much as 12 percent on the New York Stock Exchange on Monday after the state-controlled oil and gas company reported an underwhelming fuel price increase. Petrobras has lost more than 30 billion Brazilian reais ($12.77 billion) over the past two years because it has resisted increasing fuel prices in an effort to fight domestic inflation, which is currently running at about 5.8 percent compared to a target rate of 4.5 percent.

The Brazilian government controls a voting majority in the company, and the nation’s finance minister serves as chair¬†of the company’s board of directors. The state has kept fuel prices low over the past few years despite the fact that oil prices have doubled since hitting a trough below $50 a barrel in the wake of the 2008 financial crisis. This policy, although a firm strategy in the face of rampant inflation, has eroded the oil company’s earnings because the firm has essentially been selling fuel at a discount.

A price increase has been a long time coming, but it needed to satisfy certain conditions in order to justify the bullish thesis outlined by analysts at banks like Credit Suisse. Credit Suisse analyst Vinicius Canheu has previously upgraded the stock in part on the expectation that the government would ease up price controls. The price increases announced at the end of November, though, didn’t appear to get the job done.

Just a few days after the price increase was announced — 4 percent for gasoline and 8 percent for diesel — Canheu downgraded the stock straight to sell. The analyst calculates that in order to accomplish its stated goal of reducing its debt burden to below 2.5 times net debt to EBITA (earnings before interest, taxes, and amortization), it would have to increase fuel prices by 20 percent in 2015.

The recent price increases don’t really signal a willingness to do this, given that inflation is still running above trend. Gasoline prices in Brazil have increased 15 percent and diesel prices have increased 22 percent since June of 2012, but significant increases in 2014 seem unlikely because of the upcoming election.

The Brazilian real could also continue to weaken relative to the dollar thanks to the tides of U.S. monetary policy. Accomodative policy encourages investment, but a tightening of policy could see capital withdrawn from Brazil, as was demonstrated a few months ago when there was speculation that the Fed would taper asset purchases. The real has fallen approximately 20 percent since May of this year, and a continued decline could help fuel inflation. Brazil’s central bank sees inflation at about 5.7 percent in 2014.

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