RIO DE JANEIRO Shares of Brazil's state-led oil company Petrobras (PETR4.SA) slipped to a seven-week low on Monday on concern about falling profit, declining output and doubts that the government will allow fuel-price increases needed to stanch refining losses.
Petrobras preferred shares, the company's most-traded class of stock, fell 3.39 percent to 21.35 reais in Sao Paulo on Monday, its lowest close since September 11 and its biggest one-day drop since July 31.
Late Friday, the company said third-quarter net income fell 12 percent to 5.57 billion reais ($2.7 billion) compared with the year-earlier quarter. The result was a surprise. The average analyst expectation was for profit to rise 20 percent.
The results and other recent developments have increased 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.
"This is probably the worst set of data ever seen from the company," Emerson Leite and Andre Sobreira, oil company analysts with Credit Suisse in Sao Paulo, wrote in a report. "It will take a long time to turn the Petrobras ship around and investors are paying dearly for it."
Third-quarter profit fell despite the company receiving permission in June from the government, Petrobras' controlling shareholder, to raise wholesale gasoline and diesel prices for the first time in six years.
Much of the increase was erased by higher costs, analysts said. The cost of producing a barrel of oil, the so-called lifting cost, rose 15 percent to a record high $15.42 a barrel. Petrobras blamed a new labor contract for much of the rise.
The fuel price increases were not as large as the company wanted, refining and supply chief José Carlos Cosenza told analysts and reporters on conference calls to discuss third-quarter results.
As a result, fuel prices in Brazil remain below world levels by as much as 20 percent, according to some analysts.
This causes losses at Petrobras because the company's refineries cannot keep up with rising domestic demand and it must import fuel at world prices to fill the gap, Chief Financial Officer Almir Barbassa told analysts and reporters on Monday.
Because of Brazilian pricing policies, Petrobras sells the imported fuel in Brazil at a loss, Barbassa said.
Petrobras' refining unit lost 5.65 billion reais in the third quarter, increasing the unit's losses for the year to 17.3 billion reais, the company said.
LOSSES MAY CONTINUE
Relief from refining losses may take at least two years, when the first of four planned refineries starts operating, allowing Petrobras to cut fuels imports, Barbassa said. There is almost no room for extra domestic fuels output because Petrobras' 12 Brazilian refineries are operating at 98 percent of capacity.
"Refined product supply will only catch up with demand with the start-up of new refineries in Brazil," Barbassa told reporters at company headquarters.
He declined to give any date for when Petrobras may be allowed to raise fuel prices again. The first new refinery to start operations, the Abreu e Lima refinery near Recife in Brazil's northeast, is scheduled to start operations in November 2014.
Already four years behind schedule, the cost of the 165,000 barrel a day refinery is expected to balloon to $20 billion, 42 percent more than a February estimate and nearly five times the original $4.3 billion budget set in 2008.
"NO IMPROVEMENT WHATSOEVER"
As costs rise, production is falling.
Petrobras said total September output fell 4.8 percent from a year earlier to an average 2.472 million barrels of oil and natural gas a day in Brazil and abroad, the company's lowest level since January 2009.
"The truth of the matter is that there were no operational improvements whatsoever (in the quarter)" Paula Kovarsky and Diego Mendes, oil company analysts at Banco Itau BBA in Sao Paulo, wrote in a report. "We, therefore, expect a negative market reaction to the numbers, particularly the rising costs."
Company officials said the output declines were largely the result of planned maintenance on offshore oil production platforms that required output to be shut down temporarily.
The company expects to have a large number of platforms undergo maintenance in 2013, a situation that should keep output in Brazil at about the same level as today. So far this year Petrobras has produced an average of 1.98 million barrels of oil a day in Brazil.
(Reporting by Reese Ewing, Jeb Blount and Leila Coimbra.; Writing by Jeb Blount; Editing by Gerald E. McCormick, John Wallace and Dan Grebler)