Petrobras surprises as third-quarter profit drops on refining loss
RIO DE JANEIRO
RIO DE JANEIRO (Reuters) - Brazil's state-led oil company Petrobras (PETR4.SA) said on Friday that third-quarter profit fell as refining unit losses rose, an unexpected result after being granted its first wholesale fuel-price increase in six years in June.
Consolidated net income fell 12 percent to 5.57 billion reais ($2.7 billion) in the three months ending September 30 compared with 6.34 billion reais in the third quarter of 2011, Petrobras said in a statement.
The average estimate in a Reuters poll of 16 analysts was for a 20 percent profit increase to 7.60 billion reais. The profit reversed a 1.35 billion real second-quarter loss, the first in 13 years at Petrobras.
Declining profit may increase concern that the company is drifting under Chief Executive Maria das Graças Foster. Production is stagnant, costs have soared, and the company has found it increasingly difficult to generate cash from operations to pay for a $237 billion expansion, the world's largest corporate investment program.
It may also add credence to comments by investors and analysts that recent fuel price increases were not enough. Some say the government's pricing polices now risk limiting Petrobras' ability to use new-found oil wealth to catapult Brazil into the ranks of the world's top-five economies.
"The government's reluctance to raise prices is now seriously hurting Petrobras," said Edmilson Moutinho dos Santos, an energy economist and natural gas researcher with the University of Sao Paulo. "Already heavily in debt, Petrobras depends on domestic fuel sales to finance investment."
Petrobras' refining unit lost 5.65 billion reais in the quarter, increasing losses for the year to 17.3 billion reais.
Meanwhile capital spending rose 12 percent to 21.1 billion reais from 18.8 billion reais a year earlier.
Refining losses and increased spending overwhelmed a 15 percent increase in net sales, or total sales minus sales taxes. The 71.8 billion reais of revenue recorded in the quarter narrowly beat the average estimate of 71.1 billion reais.
Higher Brazilian fuel prices are crucial to Petrobras improving results. Until it allowed Petrobras to raise gasoline and diesel in June and diesel again in July, the government has kept the wholesale price steady since 2006, according to Sindicom, Brazil's fuel retailers' association.
In June CEO Foster said that without fuel price increases, the company won't be able to finance its investment plan. Aimed at more than doubling output to 5.7 million barrels of oil and gas equivalent a day by 2020, the plan aims to help make Brazil one of the world's largest oil producers.
Prices remain about 20 percent below market levels, however, according to analyst Lucas Brendler of Banco Geração Futuro in Porto Alegre, Brazil.
Refining losses have been made worse by a shortage of sugar cane ethanol, which led the government to cut the biofuel's content in gasoline to 20 percent from 25 percent.
With fuel demand rising in Brazil, Petrobras refineries couldn't keep up. Petrobras' net fuel and crude oil imports rose 57 percent to 271,000 barrels a day in the quarter.
But because it bought the fuel at world market prices, it sold it at home at a loss. Exploration and production unit profit rose only 4.4 percent.
Less than five years ago Petrobras was a net exporter of oil and fuel and since then it has discovered some of the world's largest oil reserves off the coast of Rio de Janeiro.
"Petrobras is having trouble with the two foundations of an oil company," said Adriano Pires of the Brazilian Infrastructure Institute, a Rio de Janeiro energy research group. "It is having trouble raising oil production and in the profitability of fuel sales."
For the government, though, ethanol, gasoline and diesel are a serious problem. Transportation fuels make up a large portion of the country's benchmark consumer price index.
For a country that struggled to end high inflation and still has some of the world's highest interest rates, renewed concerns over inflation could force the government to raise borrowing costs, choking off growth.
As a result new fuel price hikes may not happen, Dos Santos said. Nationwide municipal elections this Sunday made additional fuel increases politically unpopular and now inflation concerns are rising again.
Government officials have repeatedly said that more fuel price increases are not possible this year but may happen in 2013.
"Except for the elections, the last three months was probably the best time in years to raise fuel prices in Brazil," he said. "With inflation ticking up that window may be closed for good."
Refining's drag on the company can be seen in the company's earnings before interest, taxes, depreciation and amortization, or EBITDA, which fell 13 percent to 14.36 billion.
EBITDA is a measure of a company's ability to generate profit from operations and it shows operations getting more sluggish. The average estimate expected EBITDA to fall 3.29 percent from a year earlier.
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