Brazil Currency Plummet Hits Petrobras Hard|
Nov. 14, 2011
Published by Minyanville
Brazilian state oil company Petrobras (PBR) announced a 26% drop in net profit in the third quarter, compared to the same period in 2010 -- a 41% drop on second-quarter profit.
The news is thanks to the real’s whopping 19% decline against the US dollar during the period, which hit many of Brazil’s largest companies that hold their debt in foreign currency.
Profit at the oil company was $3.64 billion during the period, down from $4.93 billion the previous year. The foreign exchange losses were, however, offset by an increase in crude oil prices, which lifted profits before EBITDA 13% from the previous year, to $9.58 billion. This was supported by an increase in domestic demand.
Though the overall figure shows a sharp decline, the damage is not as bad as that predicted by a Reuters poll of six analysts last week, which forecast a drop of 44% in net profit.
After second-quarter profits for the company were up 32% back in August (see Rousseff's Popularity Drops as Brazil's Economy Overheats), Petrobras CFO and investor relations officer Almir Guilherme Barbassa was able to credit the real’s strength against the US dollar for decreasing the value of its debt. However, the rise of the currency against the US dollar U-turned in July, ending the currency war but hitting companies like Petrobras and iron ore producer Vale (VALE) hard (see As Brazil's Lula Gets Treated for Throat Cancer, Rousseff Prepares Stern Words for Europe).
“It's important to point out that even with the [currency] depreciation, we saw stronger cash flow,” Barbassa said. “[This] is fundamental for a company that has the world's largest investment plan.”
That investment plan is indeed huge. The company aims to spend $225 billion over the next five years, developing deepwater subsalt regions off the country’s coast.
The funds for the mammoth project may be sought next year, as the company waits for the global market to stabilize. Already this year, the company has raised $13 billion, just under half of which -- $6 billion -- came from bond sales. Barbassa says that Petrobras may borrow the money in euros.
However, rivals ExxonMobil (XOM), Chevron (CVX) and Royal Dutch Shell (RDS) all posted third-quarter profits of above 40%. That comparison will worry the Brazilian government, already fighting uncertainty in Europe as well as its own soaring inflation.
The government-backed policy of maintaining domestic gas prices, despite a rise in international oil prices, led to Petrobras’ refining division posting a $1.82 billion loss in the third quarter.
Consumer prices were up 0.43% in October, from the previous month, just above estimates, according to government statistics released last week. Though above a 0.41% prediction from analysts surveyed by Reuters, the figure slows running annual inflation to 6.97% over the last 12 months, down from 7.31% the previous month.
While still above government targets, the figures are more evidence that Brazil’s economy is continuing to cool, a relief for authorities there who have been battling soaring inflation as well as an out-of-control real for months.
“Inflation has probably peaked,” wrote Neil Shearing and David Rees, Emerging Markets economists at London’s Capital Economics, in a note to investors this week.
That was one piece on evidence against criticism of the recent interest rate cuts. The pair suggest that food inflation is likely to decrease over the next six months, bringing the annual figure down to its 2.5% to 6.5% target by the first quarter of 2012.
They also pointed out a current “sharp slowdown,” with both GDP and consumer spending down. The Central Bank next decides on interest rates at the end of this month.
Yet another Brazilian minister looks set to resign for corruption allegations, the seventh this year and during the turbulent tenure of President Dilma Rousseff. Depending on your fondness for the president, this is either a sign of her zero tolerance for corruption or that she is a political “novice,” unable to keep a tight rein on her government.
The magazine often at the forefront of these allegations, Veja, accused Labour Minister Carlos Lupi of demanding bribes from nongovernmental contractors.
“To get me out, you’d have to shoot me,” Lupi told reporters. “It would have to be a big bullet because I’m a big guy.” Unfortunately for him, Rousseff will do whatever it takes to maintain an ostensibly clean government.