Army General Taking Petrobras Helm After Bolsonaro Shakeup

(Bloomberg) -- A general close to Brazilian President Jair Bolsonaro is poised to take the reigns at Brazil’s state-controlled oil giant in a leadership change that has dismayed investors.

With the government holding a majority of voting rights, Joaquim Silva e Luna was named to the board of directors of Petroleo Brasileiro SA in a shareholders meeting on Monday, a formal step before being appointed as chief executive officer. Carlos Alberto de Oliveira, the head of exploration and production, will be the interim CEO until the board selects a replacement, Petrobras said in a statement.

Luna will need to navigate the conflicting priorities between Bolsonaro, who wants the company to do more to shield consumers from rising fuel costs, and investors who want it to charge market-based prices to help slash debt and pay dividends. The specter of increased government intervention in the Rio de Janeiro-based producer has made it the worst-performing major oil company this year.

Investors are waiting on the team Luna assembles to gauge if the company will prioritize political concerns over the bottom line.

Fuel subsidies risk derailing Petrobras’ efforts to divest a group of refineries, a key source of funding to develop giant oil fields in the South Atlantic that are the foundation of the company’s future growth and profits. More competition in refining would make it harder for the government to intervene in price levels.

“Without the divestment program, they will have to find alternatives or reduce investments,” said Marcelo de Assis, the head of Latin American upstream research at consultant Wood Mackenzie Ltd.

Bolsonaro started lambasting outgoing CEO Roberto Castello Branco in February over rising fuel prices and decided not to renew his mandate. The executive, a free-market champion who won praise from investors for successfully steering the oil producer through the pandemic and strengthening its finances, went through an extended and often awkward swan song before being formally removed by the board on Monday.

Castello Branco continued his policy of market-based fuel prices despite criticism from the president. Last week Bolsonaro berated the company for lifting natural gas prices, sending shares lower and prompting Petrobras to seek clarification from the energy ministry about what the president meant.

In his final earnings call with analysts last month, the executive sported a “Mind the Gap” T-shirt in a reference to how Petrobras improved its performance compared to other oil majors during his tenure.

The recent events at Petrobras underscore how rising crude prices are a mixed blessing for many oil companies in the developing world, and often lead to costly subsidies. Mexico is seeking to control prices and Argentina’s YPF SA has both capital and price controls in place. Even in Colombia, a country with a stronger track record of business-friendly policies, state-controlled Ecopetrol recently agreed to buy a state power company for $4 billion in a deal that unnerved the market.

“There’s a Goldilocks scenario for oil prices in Latin America,” said Fernando Valle, an analyst at Bloomberg Intelligence. “$100 oil would be great, but in reality it is detrimental because of inflation, and then governments make bad decisions like price controls.”

The abrupt leadership change has led to a slew of defections from the company’s board and management team, undermining Petrobras’ governance at a time environmental, social and governance practices, or ESG, are a growing priority among investors. One of the outgoing board members, Omar Carneiro da Cunha, said in a March 2 statement that he stepped down because of “management practices.”

For Bloomberg’s ESG rankings of oil and gas companies, click here.

While ESG funds don’t normally target emerging markets, Petrobras is in 31 ESG funds globally, including the DFA Emerging Markets Core Equity Portfolio, the largest such fund, according to data compiled by Bloomberg.

Some investors see room for improvement after Petrobras shares fell 16% this year. The more than 20% gain in benchmark global oil prices this year and the weakening of the Brazilian real should help Luna keep the company profitable, said Eduardo Morais, a fund manager at Principal Financial Group’s Claritas Investimentos in Sao Paulo.

“One of his main tasks will be to not mess things up,” Morais, who boosted his Petrobras holdings after the stock’s tumble in February, said. “The firm is expected to generate a lot of cash.”

What Bloomberg Intelligence Says

The replacement of Petrobras’ CEO due to disagreements with the Brazilian government over fuel pricing remains an overhang for the company, even as its operations improve. Results should benefit from higher commodity prices and the streamlining of its business, which has led to substantial cost decreases. This could be thwarted under new management if changes to fuel pricing are rolled back to control Brazil’s inflation.

-- Fernando Valle, BI oil analyst

Click here for the research.

Brazil’s securities regulator has at least four separate probes into how how the CEO shift was disclosed and any possible use of privileged information. The company’s image was also tainted by a member of the outgoing CEO’s team. The head of human resources was fired for inappropriately trading shares during Castello Branco’s fallout with Bolsonaro, the company said March 29.

The turmoil at Petrobras comes at a time Bolsonaro is on the defensive over his ineffective response to the pandemic and the slow pace of vaccinations. He overhauled his entire cabinet last month, underscoring the makeshift nature of his government right now.

“The worst part about the governance is he is essentially being put in place to do the government’s bidding, and not for minority shareholders,” said Bloomberg Intelligence’s Valle.

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