As has been recurring, Petrobras (PETR3;PETR4) had a very busy day last Monday (27th).
In addition to the approval of the new CEO, Caio Paes de Andrade, by the Board of Directors, the company announced yesterday, after the market closed, the resumption of the process of selling some of its assets. Among them, the Abreu e Lima Refinery (RNEST), in Pernambuco, the Presidente Getúlio Vargas Refinery (REPAR), in Paraná, and the Alberto Pasqualini Refinery (REFAP), in Rio Grande do Sul, in addition to the integrated logistics assets.
The process was resumed with the release of sales teasers for the three refineries. These provide information on productivity and technical specificities of the asset, in addition to determining the eligibility criteria for their acquisition. In terms of production, RNEST corresponds to 5% of the total oil refining capacity in Brazil, REPAR, 9%, and REFAP, 9%. As determined in the teasers, the buyer of any of the 3 assets must have revenue of at least US$3 billion in 2021 if it is an oil and gas company, or have at least US$1 billion in Assets Under Management ( AuC) if you are a financial investor.
For Credit Suisse, if successful, the sale of refineries could bring significant benefits to the oil company.
Divestment would mitigate price risk, which historically has been the most important risk for the investment case, as well as reduce future capital needs downstream (refining and distribution).
Credit Suisse maintains an outperform rating (above market average performance) for Petrobras ADRs and a target price of US$ 17 against Monday’s (27th) quotation of US$ 11.78 (or upside potential of 44, 3%).
However, there are many doubts about whether this sales process will take place. According to analysts at Bradesco BBI, there are chances that the process will fail again due to the political scenario in Brazil, with the elections approaching and amid the escalation of the populist debate on fuel prices.
Levante Ideias de Investimentos also points out that the reopening of the divestment process of refineries, as agreed with the Administrative Council for Economic Defense (Cade) is positive, but with little chance of progress in the short term. “Remembering that Petrobras has already tried to sell these refineries before and it was not successful, in addition to being a complex and time-consuming process”, points out the research team.
The analysis house points out that Petrobras’ divestment plan, the opening of the refining market and greater competition in the sector are extremely positive measures for the country and the medium-term solution to mitigate the risk
of fuel shortages. “Through competition, clear rules and legal certainty, investments are made in the sector, increasing our refining capacity and supplying domestic demand, which currently needs to import about 25% of the fuels consumed in the country (30% in the case of diesel)” , assess analysts at Levante.
Credit also points to the fact that Brazil is in an election year and that the current discussions about domestic fuel prices in the country could effectively weigh on the attractiveness of the business. On the other hand, analysts at the Swiss bank assess that the timing seems ideal from the point of view of global refining margins, with crack spreads [diferenciais entre o preço do petróleo e os produtos de petróleo extraídos dele] at all-time highs, which could prove very attractive in terms of short-term cash flow generation if such spreads persist.
For 2023, Levante’s analysts view the divestment plan with greater skepticism, especially in a possible change of government. Former President Lula has already made strong statements against the sale of refineries and that Petrobras should invest in new refineries. “We cannot fail to highlight how these investments were harmful to the company in the not-so-distant past, with overpriced disbursements, later identified in Petrolão, and high destruction of value for the company’s shareholders”, they point out.
Appointment of Caio Paes de Andrade
The news of the approval of Paes de Andrade as president of the state-owned company was also highlighted, with investors eyeing the policies that Petrobras’ new CEO must implement.
Jair Bolsonaro said yesterday that Paes de Andrade will give a “new dynamic” to the company.
“Caio is taking over Petrobras today, we will have new dynamics in the fuel issue. Everything will be analyzed on the basis of the law, without wanting to mess with the pen in the Law of State-owned companies, without wanting to interfere in anything, but with a lot of respect and a lot of responsibility ”, he said in a ceremony at Palácio do Planalto.
As Levante points out, the choice of Paes de Andrade was not a surprise, but it did generate revolt in some entities. The Federación Únicas dos Petroleiros (FUP) stated that it is filing a lawsuit jointly with the Association of Oil Shareholders (Anapetro) against the appointment of the CEO. The entities allege that the choice of the former Secretary of Debureaucratization of the Ministry of Economy goes against the guideline of the State-Owned Companies Law, which provides robust professional experience in the sector as a requirement for determining a new president. Both also highlight political motivations for choosing the name of Paes de Andrade for the position.
“What is surprising are the three votes against the nomination [por sete votos a favor e três contra] and the questioning in court by the FUP. However, we believe that such problems can be circumvented without major difficulties”, they evaluate.
For Levante, the election of Paes de Andrade, as well as the recent accommodation in oil prices (albeit with a rise in the last three sessions), momentarily relieves the pressure on the company and should reduce the volatility of its shares in the short term. . “However, we cannot fail to point out that there is still a lot of uncertainty regarding how the
his term in an eventual, and probable, rise in oil prices”, he points out.
Analysts point out that the demand for diesel is seasonally higher in the second half of the year, when we need to harvest the winter crop and sell it. At the same time, the hurricane season begins in the United States, which could affect the supply of fuel. If such a scenario materializes, which he sees as very likely, a readjustment in the price of diesel is extremely necessary so that there is no shortage of the product at a crucial moment for the country.
Even with the readjustment carried out recently, the fuel lag is around 9%, according to Abicom.
Another alternative would be the local supply of fuel through state subsidies. “In this case, it imports at high prices to sell in the domestic market at artificially lower prices. This measure would be extremely harmful to the company and its shareholders, with the bill being paid by Brazilian taxpayers”, the analysts point out.
The column by Lauro Jardim, from the newspaper O Globo, highlights that the parliamentarians hope that the new president of Petrobras will propose some formula that will make the price of fuels fall at the stations. Just like cooking gas at dealers – this would be the “new dynamic” mentioned by Bolsonaro (PL) in his speech yesterday.
The easiest alternative would be to “push an eventual readjustment with the belly” – if the oil price allows it. However, from the shareholders’ side, Paes de Andrade will be pressured from “all sides” to follow the policy of international price parity. Folha emphasizes that the company must claim “social impact” to avoid further readjustments.
Thus, expectations are for greater volatility amid the political news impacting the state-owned company. However, there is still room for optimism, as is the case of Itaú BBA, which yesterday reinforced its outperform recommendation for the PETR4 share, with a target price of R$43.
“While we are sensitive to the intense flow of news about the company, we have adjusted our lens to focus on the company’s strong fundamentals and solid operating performance,” Monique Greco and team noted in a client report. These factors, they say, combined with current high oil prices and rising production volumes, “will likely result in cash flow generation too strong to ignore, especially in the short term.”
For analysts, the current stock price seems discounted enough to accommodate even very extreme and, in their opinion, unlikely scenarios.
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