Buy-Rated Petrobras With Government Concerns

Political influences on Petrobras (PBR) affairs were always among our concerns. As the company is controlled by the Brazilian Government, sometimes political issues are more important for the company than its corporate interests. This is something that Petrobras shareholders need to be prepared to face, and it will not change any time soon.

In our last report on Petrobras we wrote: “The Chairman of Petrobras, Mr. Jose Sergio Gabrielli, stated that the definition of Brazilian domestic gasoline and other oil derivates is a matter of political decision (!) and not ‘exclusively’ a technical and economic matter.

“During the first half of 2008, when international oil prices soared, the company was forced to keep prices of gasoline and diesel unchanged in Brazil in order to fight inflation. Now that oil prices have collapsed, the Brazilian Government has put together a ‘technical’ team to define a new price for gasoline and diesel in the short-term.”

The “technical team” has now reached a conclusion! Yesterday, Petrobras announced a price cut of 4.5% in average for gasoline and up to 15% for diesel. Even worse, prices for final consumers of gasoline will be unchanged, since, at the same time, the value-added tax on gasoline was raised in order to solve some fiscal problems, like federal taxes in Brazil being affected by the soft economy.

There is some good news on Petrobras too. According to Brazilian newspapers, it will be announced in the following weeks the new exploration model for the giant pre-salt fields to be auctioned in the near future. Despite some odd suggestions, it seems that the Government will embrace the partition model, which is common worldwide.

According to the papers, auctions will take place and the winner will be the one who agrees to give more production to the Government in exchange for the right to explore the field. However, it is not yet clear if a new State company will be formed to manage the contracts.

All considered we are keeping our positive view on Petrobras based on the production growth outlook for the near future due to the exploration of the pre-salt fields already auctioned.

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