Brazil Controls Mean Petrobras Can’t Turn Oil Price Surge Into Profit Gain

Petroleo Brasileiro SA, which lost a quarter of its market value this year, is set to post the smallest profit gain among the world’s largest oil producers because of government controls on fuel prices.

The Rio de Janeiro-based company will report tomorrow that profit was little changed at 89 centavos a share in the three months through June, according to the average of four estimates in a Bloomberg survey. That would be the worst performance of any of the top ten major oil companies with the exception of BP Plc., whose earnings were hurt by the Gulf of Mexico oil spill.

While competitors Exxon Mobil Corp. and Royal Dutch Shell Plc are free to pass on rising oil prices to consumers at the pump, state-controlled Petrobras is constrained by government caps on how much it can charge consumers in Brazil. Petrobras cut gasoline prices by 4.5 percent and diesel 15 percent in June 2009 and hasn’t increased them since. Oil in New York averaged 31 percent higher in the second quarter than a year earlier.

“Oil company profits basically float with oil prices; gasoline and diesel basically follow oil prices,” Bruno Varella, an analyst at Banco Bradesco SA in Sao Paulo, said in a telephone interview. “It’s the opposite for Petrobras.”

Exxon, the world’s largest publicly traded oil company, reported a 91 percent rise in second-quarter profit. U.S. producers Chevron Corp. and ConocoPhillips said profit more than tripled. Shell and Total SA reported increases of 15 percent and 72 percent, respectively.

Not Benefiting From Gain

Petrobras didn’t benefit from a gain in international gasoline and diesel prices because of the fuel price regulations in Brazil, Andres Kikuchi, an analyst at brokerage Link Investimentos in Sao Paulo, said in a telephone interview on Aug. 6.

Petrobras’s press office in an e-mailed statement declined to comment on its gasoline operations.

“If you look at the figures of the other oil companies, most of the explanation of the good results comes from the downstream,” Johan Van Geeteruyen, who helps manage 14 billion euros ($18 billion) at Petercam SA in Brussels, said in a telephone interview. Downstream refers to the refining of crude oil and the distribution of products such as gasoline.

Petrobras and Brazil’s government have an informal agreement to keep fuel prices at a level that guarantees profits for the company and price stability for consumers, said Adriano Pires, head of the Brazilian Center for Infrastructure.

‘Political Price’

“The price in Brazil is a political price,” Pires said in by telephone from Rio de Janeiro on Aug. 11. “Petrobras makes sure it doesn’t generate problems for the government.”

Irving, Texas-based Exxon said second-quarter refining earnings more than doubled to $1.22 billion, while San Ramon, California-based Chevron said its refining earnings jumped more than sevenfold to $975 million.

PetroChina Co., the world’s second-largest producer, OAO Gazprom, the sixth biggest, and China Petroleum & Chemical Corp., which ranks No. 9., haven’t released their results. BP posted a record loss in the second quarter after taking a $32.2 billion pretax charge related to the Gulf of Mexico oil spill, the worst ever in the U.S.

Petrobras has plunged 25 percent this year, compared with a 4.1 percent drop in the Bovespa index. The NYSE Arca Oil Index, a price-weighted index of the leading companies involved in the exploration, production and development of petroleum, is down 7.8 percent.

UBS Cuts Rating

Petrobras fell 3.2 percent to 27.50 reais yesterday in Sao Paulo trading, the most since June 24. Petrobras declined after UBS AG became the only bank to recommend selling the stock.

Investors will be “disappointed” with the price the government puts on 5 billion barrels of undeveloped oil reserves it plans to exchange for Petrobras shares, UBS equity analyst Lilyanna Yang wrote in a report. A higher price means Petrobras will have to sell more stock in a planned offering this year, increasing the “dilution” of earnings per share, she wrote.

Petrobras is spending too much on “political” projects, including new refineries, instead of the offshore drilling equipment needed to tap oil fields in the deep Atlantic, Wagner Freire, an independent energy consultant and former Petrobras exploration and production manager, said in a telephone interview from Rio de Janeiro on Aug. 9.

‘Basic Points’

“All major oil companies have higher profits; at Petrobras it should have been much better,” Freire said. “Production is not growing as much as it should. Management is not giving attention to the basic points of an oil company.”

Petrobras will spend 53 percent of its $224 billion five- year investment plan on exploration and production. About $33 billion will go to tapping discoveries in the so-called pre-salt region in Brazil’s deepwater where Petrobras found Tupi, the largest discovery in the Americas since Cantarell in 1976.

Oil output grew less than expected as Petrobras failed to replace declining output at its traditional fields with enough new production, putting the company’s long-term targets at risk, Freire said.

Production rose 2.5 percent to about 2.59 million barrels in the second quarter, based on monthly production figures from Petrobras. Link’s Kikuchi expects Petrobras to boost output by 3 percent this year, compared with a 7.8 percent target in the company’s business plan.

Petrobras, in its e-mailed response to questions, said it maintains its target of 2.72 million barrels a day this year.

“Petrobras’s guidance in terms of oil production tends to be disappointing,” said Mirela Rappaport, who helps manage about $100 million at Investport in Sao Paulo, including Petrobras shares.