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Petrobras to cut refining investments by 40%

02.26.2014  | 

The refining division has lost about $37 billion since 2011, when the government, which owns the majority of the company’s voting shares, started making Petrobras subsidize imported fuel.

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By RODRIGO ORIHUELA and PETER MILLARD
Bloomberg

Petroleo Brasileiro SA, the world’s most indebted oil company, slashed its five-year investment plan by $16 billion as it cut spending in its unprofitable refining division.

Petrobras, as the state oil company is known, will spend $220.6 billion in a plan through 2018, 6.8% less than had been earmarked in its prior plan, the Rio de Janeiro-based company said in a regulatory filing after markets closed. Investments in the refining division will drop to $38.7 billion from $64.8 billion in the previous plan.

Petrobras increased the price of gasoline by 4% and the price of diesel by 8% on Nov. 29, the first boost in nine months, as part of its attempt to cut the gap between global and domestic prices. The refining division has lost about $37 billion since 2011, when the government, which owns the majority of the company’s voting shares, started making Petrobras subsidize imported fuel.

“They are re-directing capital spending to the higher- margin, higher-value upstream side of the business over the lower-margin refining side of the house,” Gianna Bern, president of Chicago-based risk-management adviser Brookshire Advisory & Research, said in a telephone interview. “Overall that’s where you’d really rather see them focus their efforts.’

Sliding Profit

Petrobras’s fourth-quarter profit dropped 19%, less than analysts expected, as net income slid to 6.28 billion reais ($2.68 billion), or 48 centavos/share, from 7.8 billion reais, or 59 centavos, a year earlier, the company said. Per-share profit excluding some items beat the 41-centavo average of 12 analysts’ estimates compiled by Bloomberg.

Gasoline and diesel imports are curbing profit as Petrobras pays more than what it receives from domestic distributors for the fuel at subsidized prices. The government has prevented the company from increasing prices enough to erase the losses as it seeks to keep inflation in check.

‘‘Overall, we view the plan as positive, with key factors moving in the right direction,” Bank of America Corp. analysts Frank McGann and Vicente Falanga Neto said in a report to clients. “However, we doubt it will have a big effect on near- term stock performance, given broader concern on pricing.”

The reduction in refining division spending comes as the company prepares to bring two new refineries, Comperj and Abreu e Lima, online by the second half of 2015. No details were provided for the decrease in refining investments.

Oil and liquefied natural gas production in Brazil is forecast to grow by 7.5% in 2014 from the 1.93 million bpd pumped in 2013, Petrobras said.

Production Target

The company reiterated its 2020 domestic output target of 4.2 million bpd of oil and liquefied natural gas. The company will spend $153.9 billion in exploration and production in the five-year period, up from $147.5 billion in the prior plan.

Petrobras said the exploration and production unit had higher quarterly profit than a year ago because of increased volumes, fewer dry wells and the sale of a stake in an offshore oil field.

In the refining division, quarterly losses decreased to 5.5 billion reais from a year earlier, following the fuel price increase. The fourth-quarter gap between international and domestic prices was 11% for gasoline and 19% for diesel, according to Deutsche Bank estimates.

Petrobras said it ran its crude refineries at an average 97% of capacity last year as it boosted output in an attempt to lower reliance on imported fuel. The company previously said its refinery rate was 92%.

Most Indebted

The company’s $114.3 billion in debt makes it the most indebted oil company in the world, according to data compiled by Bloomberg.

Higher debt is coupled with the company’s expectation that it won’t generate positive cash flow until 2016, while posting the highest negative cash flow among global oil producers.

In October, Petrobras presented a proposal to the board to create a methodology for adjusting prices automatically. On Nov. 29, the board authorized the first fuel-price increase in nine months without divulging a formula for future adjustments. The stock plunged 9.2% the next trading day.

In the face of concerns over weak economic growth this year in Brazil, the government probably won’t change its stance on fuel prices any time soon as it prepares for presidential elections in October, Joao Castro Neves, an analyst at Eurasia Group, said by telephone from New York.

Economic Growth

Brazil’s government expects the economy to grow 2.5% in 2014 and inflation to reach 5.9%.

After the stock slumped 18% in the past year, 14 of 19 analysts covering the company recommend buying. The other five have a hold rating.

“Making our shares valuable and the fair return to our shareholders is the result of the natural fulfillment of our obligations,” CEO Maria das Gracas Foster said in a letter published with the earning report.



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