Will Fuel Price Rises Be Enough For Petrobras?

Dec.21.12 | About: Petrobras - (PBR)

By Mitchell Hall

With Brazilian fuel subsidized by 20% below international fuel prices in a bid to control inflation, word that Brazil's government appears to have decided to allow prices to rise is bad news for drivers but good news for state-owned energy giant Petrobras (NYSE:PBR).

Brazilian Finance Minister Guido Mantega told reporters on Wednesday that Brazil will "certainly" raise gasoline prices in 2013, while Valor Econômico newspaper reported that President Dilma Rousseff will increase local fuel prices at the pump early next year, citing unnamed government sources.

The Wall Street Journal says that local newspapers interpreted the news as a breakthrough commitment following months in which Mantega and Petrobras officials have evaded questions on the issue of gasoline prices.

Finance Minister Mantega is also chairman of the Petrobras board; the Brazilian government owns 80% of the publicly traded company. Mantega has been clashing with new Petrobras CEO Maria das Graças Foster over the subsidies for the past year, which have forced the company to import foreign oil and sell it at a loss.

Petrobras was allowed to raise the wholesale price of gasoline and diesel in June, and diesel again in July. These were the first increases since September 2006. It wasn't enough. The company has been leaking money at a rapid rate, recording its first loss in thirteen years - $8 billion worth - in the second quarter this year.

The drain on profits had Moody's Investors Service on Monday announcing it was putting Petrobras on watch for a possible debt downgrade from its "A3" rating within the next 12 months, should debt keep increasing considerably.

Part of what is driving that increased debt is inflated costs. Reuters reports that Petrobras often spends far more than rivals to drill wells, build refineries, purchase ships and distribute its product than other major oil companies, according to company and industry sources.

CEO Foster seems to finally be aware of this. She has a cost-control plan to cut 32 billion reais ($15.4 billion) between 2013 and 2016, and is trying to sell various assets to reduce the company's debt burden, including putting its Argentine assets on the chopping block. But asset sales are slow and difficult.

Currently trading at $20.58 at the time of writing, the stock has a P/E of 13.48, reasonable dividend/yield of 0.20/4.84, and relatively high beta of 1.46, meaning it is half as volatile again as the market - no doubt thanks to the frequent and unpredictable influence of government interference.

Still, with a 52 week trading range of $17.27 - $32.60, there is theoretically plenty of potential upside waiting if, or when, the government announces a rise in fuel prices - depending on the size of them of course.