Petrobras: Should the lack of market interest in the refinery worry Petrobras’ shareholders?

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SAO PAULO – Petrobras’ announcements (PETR3; PETR4) about divestments made in refineries last Wednesday night (25) led to different assessments in the market about the company’s progress in the sale of these assets that, despite belonging to the downstream ( refining) are quite different.

According to an analysis by Morgan Stanley, with the announcements, the company showed that it took one step forward, but two backwards in its divestment process.

In the first press release, good news for the company: it signed a contract for the sale of the Isaac Sabbá Refinery (REMAN) to Atem Distribuidora de Petróleo. In the second statement, he informed that those interested in the sale of the Abreu e Lima Refinery (RNEST), in Pernambuco, did not present a binding proposal for the purchase of the refinery. Both refineries are included in Petrobras’ divestment plan.

REMAN, present in the state of Amazonas, has a processing capacity of 46,000 barrels per day and was sold for US$ 189.5 million, with US$ 28.4 million paid on the day the sales contract was signed, and US$ 161.1 million to be paid at the closing of the operation, which also has a storage terminal.

As Levante Ideias de Investimentos highlights, on the one hand, the sale of REMAN is positive for the company, which continues to dispose of assets considered non-strategic to focus on the exploration and production of oil in deep waters, mainly in the pre-salt. On the other hand, the closing of the RNEST sale process is negative, as this is one of the largest and most modern refineries in the country, with a processing capacity of 230,000 barrels of oil per day.

Credit Suisse points out that refineries that are in the process of being sold have significant differences in terms of yield, capacity, infrastructure and serve different markets, and yesterday’s announcements highlighted this difference well.

Abreu e Lima (or RNEST), recalls Levante, started as a project to expand the refining capacity in Brazil in
partnership with PDVSA (the Venezuelan state-owned company, currently bankrupt), with a 60% stake held by Petrobras and 40% by PDVSA for construction. The project was approved in September 2005, with a total budget of US$2.3 billion.

Analysts from the research firm point out that, throughout the execution, there were some project and budget revisions, with an ever-increasing increase in complexity and unpredictability, in addition to signs of overinvoicing, increasing the
final budget for $20.1 billion.

Subsequently, RNEST was divided into two projects (Train 1 and Train 2), with the completion of Train 1 only in December 2014, that is, 50% of the nominal capacity (about 115,000 barrels per day of processing) and of this capacity, only 64 percent was operational at the refinery’s debut (73,000 barrels a day of processing). Only in January 2016, with the approval of the environmental license, the refinery began operating with 100,000 barrels per day of effective processing.

“Despite the fact that RNEST has the most modern structure than others in Brazil, the unfinished works, problems with PDVSA, in addition to the lack of resources for investments, have made it one of the biggest ‘bugs’ of Brazilian infrastructure and, in the context current, one of the most challenging to sell to any interested party”, point out the analysts.

According to Levante, it is possible that Petrobras has overestimated RNEST’s assessment and the interests of possible
investors, given that the need for investments in the refinery is great, in addition to the probable need for a project review for the construction of Train 2, added to the history of overbilling. The asset would have great potential to be one of the most productive, especially in diesel refining, but the sale comes up against these issues.

What to expect

Looking ahead, Levante analysts assess that, despite the deadline set by the Administrative Council for Economic Defense (Cade), Petrobras may not be in such a hurry to continue with a divestment in this asset, given that a large part of one of the most critical goals has already been reached: the level of indebtedness.

The commitment signed by the company with Cade for the opening of the refining sector in the country provides for the sale of eight refineries, leaving the company with only five.

REMAN was only the second refinery sold so far, while the others are still in the process of being sold. “However, after the end of the sale process to RNEST, it is feared that other refineries owned by the company will not be sold”, he assesses.

Regis Cardoso and Marcelo Gumiero, analysts at Credit, hope that Petrobras will not give up on selling RNEST even if the October deadline expires, as it is one of the main refineries in the divestment cycle, with the potential to double the current capacity of 130 thousand barrels per day.

They also remained optimistic about selling other relevant refineries, such as REFAP and REGAP, ahead of the October deadline.

According to Credit analysts, the non-sale of RNEST may raise further concerns regarding the continuity of the process. But, in any case, they believe that the refinery sale process represents opportunities for buyers and that the Brazilian market brings interesting characteristics such as high operating margins, potential growth and reasonable size, with possible sales should significantly mitigate the risks of Petrobras’ pricing and capital requirements in the future.

Credit Suisse has an outperform recommendation (performance above the market average) for the American Depositary Receipt (ADR) of Petrobras traded on the New York Stock Exchange, with a target price of US$14, representing an upside potential of 28.5% about the closing of the eve.

Bradesco BBI, in turn, assesses that yesterday’s announcements point to structural issues in the sale of refineries, given that the 2022 electoral scenario represents a significant risk for fuel prices.

“The sale of REMAN has gone through, but at a value well below our $300 million valuation. In addition, we do not see the sale of REMAN as a sign that the process of selling the refineries is going smoothly, since this is a more niche asset given its smaller scale and geographic position”, they assess.

However, the economic analysis team maintains an outperform recommendation for the Petrobras share due to the high dividend payment expected for the next nine months.

Itaú BBA also maintained its positive view for the company’s share, with a purchase recommendation and a target price of R$38 for asset PETR4, representing an increase of 37% compared to the last closing.

Analysts pointed out that, despite being negative, the lack of interest in Rnest would not have greater impact on Petrobras’ action, which is still heavily discounted in comparison with market peers. Anyway, the sale of all refining assets is important, as it would reduce the company’s exposure to the fuel market, the main factor holding the company’s shares

Morgan Stanley analysts have an equal weight recommendation (exposure in line with the market average) for the company’s ADRs, with a target price of US$ 12.60, or an upside of 15.70% compared to the previous day’s closing.

They point out that, so far, Petrobras has faced challenges in the divestment process, not only at RNEST, but also with REPAR (President Getúlio Vargas Refinery, in Paraná, which had the bidding process restarted), which could increase the perception of risk for the downstream (refining) industry in the country.

Will the sale of Refap happen?

In this context, Bradesco BBI also highlights that Ultrapar (UGPA3) and Petrobras have until the end of October to negotiate the final terms for Ultrapar to buy REFAP (Refinaria Alberto Pasqualini).

So far, the deal is not an achievement, as Ultrapar could withdraw from the acquisition without paying any fines.

“Although we have argued in the past that having a refinery in Brazil could add value to Ultrapar and still
let’s believe our thesis, the political scenario in Brazil is changing and the 2022 presidential elections increase uncertainty. Meanwhile, Ultrapar remains committed to the acquisition process, and recent media reports speculated that Ultrapar would buy REFAP for $1.2 billion (vs. our fair valuation of $1.6 billion,
which does not assume that Ultrapar will implement potential future improvements)”, the analysts point out.

According to them, depending on the outcome of the election, creating value from REFAP may be materially more difficult, especially if the sale of another refinery, REPAR, does not materialize.

“Unless this government comes up with a sustainable solution to fuel prices in Brazil (such as the creation of a stabilization fund from which refiners are duly paid even in periods of uncertainty), we believe that the acquisition of REFAP could bring considerable volatility to Ultrapar’s shares in 2022. A possible successful sale of REPAR by Petrobras could help mitigate potential risks for REFAP in the future”, they point out. Analysts reiterate the neutral recommendation for Ultrapar’s shares, with a target price of R$21.

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