| RIO DE JANEIRO
RIO DE JANEIRO Petrobras (PETR4.SA), Brazil's state-led oil company, and its latest business plan have a serious problem.
The company is likely to struggle to find the cash to pay for the hundreds of ships and dozens of oil fields, drill-rigs and platforms it wants in order to catapult Brazil into the ranks of the world's top-four oil producers by 2020.
On Thursday, Petrobras made the world's largest corporate investment program even bigger, committing the company to $236.5 billion of spending by the end of 2016. That's nearly $130 million a day for five years, and $11 billion more than its 2011-2015 plan.
Without raising fuel prices, something Petrobras' controlling shareholder, the Brazilian government, hasn't allowed it to do since 2008, the plan is a fiction, said Lucas Brendler, oil industry analyst with Geração Futura, which manages $3 billion of stocks and bonds in Porto Alegre, Brazil. Petrobras, which two years ago was one of Geração Futura's biggest holdings, now only makes up about 5 percent of its portfolio.
Worse still, the plan's cuts in output targets, the first in the company's history, are likely to be bigger in coming years.
"Without a price hike the company's accounts just don't add up; they don't even come close," Brendler said. "If they don't get the fuel price rise, the outlook for the company and its share price is going to shrink even more."
Investors appear to agree. Petrobras preferred shares, the company's most-traded class of stock, fell for a second day on Friday, shedding 1.54 percent in early afternoon trading to 17.89 and on track for its lowest close in eight months.
A fuel price increase is unlikely, at least this year, said Luciano Rostagno, economist and chief strategist at the Sao Paulo unit of German bank West LB.
Transportation prices, which are closely linked to vehicle fuels, weigh heavily on Brazil's consumer price index. President Dilma Rousseff is dead set against anything that might spark inflation or slow growth, especially in the face of the European debt crisis and potential global slowdown.
"With the economy facing trouble, the currency weak, oil prices down and government efforts focused on lowering interest rates, a fuel price hike is almost unthinkable," Rostagno said.
On Wednesday, Brazilian energy minister Edson Lobão said a decline in benchmark crude prices means there is no chance of a fuel price increase this year.
While Petrobras is controlled by Brazil's government, most of its stock is owned by non-government investors.
The fuel price freeze is one of the reasons Petrobras stock is worth less today than when it began announcing giant offshore oil discoveries in October 2007. The discoveries, among the world's largest in decades, are expected to more than double Petrobras reserves to more than 30 billion barrels by 2015.
Even with recent declines in the price of Brent crude oil - it hit its highest in nearly five years, $128.40, on March 1 - Petrobras' wholesale, refinery-gate fuel price is 20 to 25 percent below levels needed to stop refining losses, Brendler said.
The government has not ruled out any price increases ever. Petrobras in the past made up for losses when prices rose by not lowering fuel prices when crude fell. Lobão suggested earlier this year that oil somewhere above $130 might force a fuel price rise.
SELLING FUEL AT A LOSS
While the company books fuel sales to its refining unit at world prices - benchmark Brent crude was little changed on Friday at $97.10 a barrel - Petrobras sells the fuel at a loss in the Brazilian market.
Since Brazil's recent economic boom helped fuel sales soar faster than Petrobras could add output and refining capacity, the company has had to increase imports to meet demand, adding to losses.
In the 12 months ending March 31, Petrobras' refining division lost 14.45 billion reais ($7.08 billion), or almost half the company's total profit in the period.
"I can't think of another major oil company in the world that operates in this crazy way," Brendler said. "They have a huge domestic market of nearly 200 million people, lots of oil but every extra liter sold boosts losses, not profit."
Measures outside a fuel-price hike offer little chance to boost cash. Oil output is not expected to rise much from today's 2.7 million barrels of oil and natural gas equivalent a day (boepd) until at least 2015, and Petrobras has reduced its outlook for future production.
Borrowing can't rise with debt close to a self-imposed limit of 30 percent of capital without putting its investment-grade credit rating at risk.
As for future oil output, the plan cut its 2020 target by 700,000 barrels a day - oil worth about $25 billion a year at current market prices - to 5.2 million boepd. Its 2016 goal of 3.3 million boepd is also 700,000 boepd less than its previous 2015 target.
"Debt is at limits, and lower and slower realization of oil production means less revenue, so the only thing left is to raise oil prices," said Luiz Broad, oil and gas company analyst with Agora Corretora in Rio de Janeiro.
He expects the government to grant a price rise in 2013.
Broad has a "neutral" rating on the stock
For Gustavo Gattass, oil and gas company analyst at Brazilian investment bank BTG Pactual, Petrobras will either get the fuel price increase, or it won't achieve its goals.
"The level of spending has been too high for a while," Gattass said. "Net debt was up some $20 billion in 2009, $27 billion in 2010 and $19 billion in 2011. Ultimately, they can't keep this pace without the price increase. It is damaging to the balance sheet."
Gattass has a "buy" recommendation on the stock, but lowered his price target after the new plan was released, to $38.50 per U.S.-traded share (PBRa.N) in 12 months. The target had been $43.
Petrobras U.S.-traded preferred shares were little changed on Friday, rising 0.02 percent to $17.68.
($1 = $2.04 Brazilian reais)
(Editing by Todd Benson, Gary Hill)