Possible government interference is seen as “acceptable” amid volatility caused by war in Ukraine

10/03/2022

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The strong rise in oil prices in the international market in recent days as a consequence of the Russia-Ukraine war has put pressure back on the pricing policy of Petrobras. As a result, the discussion about how government interference drives stocks down has re-emerged as the state-owned oil company’s share prices are traded at levels very distant from those of its main international peers.

Even as Petrobras has surged around 13% in 2022 and almost 100% in 12 months, the multiples most used by the market, such as the price-earnings ratio, are still quite lagging when compared to the major U.S.-based and European oil companies. Taking into account Petrobras’s price in dollar terms, the P/E is around 4.4 times, while peers like TotalEnergies (8.3 times), Shell (10.4 times) and Chevron (19.9 times) boast higher multiples.

Petrobras’s stocks are historically traded at a discount compared with its peers due to the uncertainty caused by potential government interference. However, the new possibility of a potential price freeze or subsidy is seen as acceptable by the market, given the exceptional moment.

Since 2016, Petrobras has adopted the international parity method to sell fuels, matching prices with what it pays to import the oil used in production as a way of not taking losses. Since January 11, the state-owned company has not made any adjustments and the disparity between the sale price at refineries and the import price has widened to around 30%. Nicolas Borsoi, the chief economist of Nova Futura Investimentos, recalled that the lack of clarity of the mechanism is even more evident in a moment of crisis like the current one.

“Since the policy was put in place, there has always been controversy about the intervals between adjustments and whether it should include currency hedging. The market has always seen it as a cushion, despite being a reasonable one, and now controversies are in the spotlight because of the international market volatility,” he said.

Ilan Albertman — Foto: Leo Pinheiro/Valor

Petrobras investors price in factors that have already been overcome by foreign peers, such as the fact that it is a semi-public company, the political risk and the lack of a real sustainability agenda, which justifies the divergence, said Ilan Arbertman, an analyst at Ativa Investimentos.

“Everyone involved needs to calm down, understand that we are in an exceptional moment, that oil prices that high are not a normal thing but a consequence of what is happening between Russia and Ukraine,” said Pedro Galdi, an analyst at Mirae Asset. There is no way Petrobras can pass on surging oil prices all at once, he added.

“They will have to pass on part of it and create some escape valve for prices, especially if the conflict continues. Petrobras’s refining unit can’t take such a big loss if oil remains at these levels for the next few months,” he said. “Everyone needs to work together.”

Mr. Arbertman believes that any solution that does not substantially change Petrobras’s economic and pricing policy fundamentals would be well accepted by the market. “Petrobras must be more transparent to the market, show how far it can handle this difference, and reiterate its support for parity.”

The analyst points out that a freeze on fuel prices, as has been suggested by the federal government, would generate destruction of Petrobras’s market cap, which would cause discomfort to investors, who would remember what happened in the last crisis involving the company.

“Some solutions discussed, such as using dividends owed to the government to subsidize fuel or creating a reserve fund as a way to ease the pressure on the pricing policy, without changing it, would be ideal,” he said. Avoiding an impact on the finances of Petrobras, he said, which have improved in recent years, would help investor confidence.

Goldman Sachs says that the creation of a new fuel subsidy program tends to be positive for Petrobras because it reduces risks to the profitability of the company’s operations in the short term. For the U.S.-based bank, the state-owned company would be reimbursed for the difference between domestic and international prices.

The government is discussing the recreation of a subsidy program similar to the one put in place in 2018 after the truckers’ strike. The topic emerged after the rise in the price of a barrel of oil in the international market with the crisis between Russia and Ukraine in recent weeks.

In a report, BTG Pactual points out that even in a situation of price controls, the good momentum of the Petrobras’s upstream business, which benefits from the rise in oil prices, would mitigate the effects of the deterioration of margins in refining.

Analysts Pedro Soares, Thiago Duarte and Daniel Guardiola wrote that Petrobras is today a much more structured, less leveraged company with lower production costs, which reduces the pressure for an immediate price adjustment.

Mr. Arbetman acknowledged that Petrobras is more structured now, but recalled that the company would not reap benefits with upstream is doing well and refining is not. “The market analyzes Petrobras as a whole. There is no point in looking at the segments separately because invariably, in terms of valuation, the asset ends up losing value.”

Mr. Borsoi, with Nova Futura Investimentos, recalled that besides the current volatility, Petrobras’s investors are also already considering the presidential elections, in October, which may mean a turning point in Petrobras’s pricing policy. “It remains to be seen whether the commitment will be maintained,” he said.

He believes that if the market considers that the government seeks solutions in order to solve social problems with the company, as was done in 2016, shares may drop as a result. “Today, the market still sees it as an exceptional situation, of war, but it is wary because of Petrobras’s history.”

Source: Valor International

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