Petrobras Q2 profit up on nonoperational gains

Brazilian state oil company Petrobras said on Monday its second-quarter net profit rose 32 percent from 2010, driven by gains linked to financial investments and currency fluctuation.

The strong results beat analysts’ estimates, but came entirely from nonoperational gains as rising costs offset the effects of higher oil prices and the company’s policy of keeping Brazilian fuel prices fixed caused a loss in the refining division.

Petrobras (PETR4.SA), which is carrying out the industry’s largest investment plan at $225 billion over five years, has won billions of dollars in investments to develop huge deepwater crude discoveries. But it has been slow to turn those reserves into higher profits by ramping up output.

The company posted net profit of 10.94 billion reais ($6.88 billion) compared with 8.30 billion reais a year earlier. The average estimate of eight analysts in a Reuters earnings poll projected profit of 10.20 billion reais.

The increase was driven by a 2.90-billion-real ($1.82 billion) gain from investing cash raised in a massive share offering last year and from a strengthening of the real BRBY — which lowers the value of debt denominated in foreign currency.

“Our financial results this year were extraordinarily better than last year, our debt ended up being smaller with the strengthening of the real,” Chief Financial Officer Almir Barbassa told reporters.

A rise in administrative, exploration and production costs wiped out the benefits of higher revenue resulting from a global rise in crude prices, causing operating profit to slip by 2.1 percent.

The refining and transport division posted a loss of 2.28 billion reais, as the company was unable to pass rising oil costs along to its consumers due to the state policy of keeping gasoline and diesel prices fixed.

That policy, which helps the government control inflation, has raised concerns Petrobras will have limited cash flow as it launches its ambitious investment campaign, which will require it to borrow heavily.

“The fact that their capex program shows lower cash flow estimations during the five year period means they have to raise more money … they are going to be free cash flow negative for the foreseeable future,” said Will Landers, who manages $8.5 billion in Latin American equities at BlackRock.

Landers, who spoke to Reuters in an interview before the earnings release, said he did not expect another share offering following the $70 billion share sale in 2010.

AMBITIOUS PLANS

Petrobras has faced withering criticism over excessive government intervention at the company that some investors worry could lead to lower returns for shareholders.

Landers brushed off those concerns, saying state interference is a “fact of life,” although he said BlackRock has reduced its positions in Petrobras.

The company’s stock has fallen 21.5 percent since the start of the year, while shares of U.S. oil giant Chevron Corp (CVX.N) have risen 8.1 percent. Exxon Mobil Corp (XOM.N) shares are roughly flat for the same period.

Earnings before interest, taxes, depreciation and amortization, a key measure of a company’s cash generation known as EBITDA, rose slightly to 16.14 billion reais compared with 15.93 billion reais in the same period of 2010.

On a sequential basis, profits were little changed from the 10.99 billion reais reported in the first quarter.

Petrobras hopes within the next 10 years to become the world’s largest publicly traded oil company by tapping vast deepwater fields off the coast of Brazil in an area the size of New York state known as the subsalt region.

That area has been home to some of the world’s largest discoveries in the last decade, including the vast Lula and Cernambi fields that hold a combined total of more than 8 billion barrels of oil.