Traders Who Dumped Petrobras Misread the General-Turned-CEO
(Bloomberg) -- Joaquim Silva e Luna’s introduction to global financial markets was as messy as they come. Shares of Petroleo Brasileiro SA plummeted when the Army general was tapped to take over Latin America’s largest oil producer as analysts rushed to slap sell ratings on the stock.
The concern was that the ex-military man with zero experience in the oil industry would acquiesce to government demands for cheap fuel and plentiful jobs from the state-controlled company. After all, his predecessor was fired via a Facebook post after a falling out with President Jair Bolsonaro over gasoline and diesel prices.
Four months later, and all the hand wringing seems dead wrong. Petrobras shares are back where they were before Luna took over, and the analysts who urged investors to sell have almost completely reversed course. That’s because Luna stuck to selling off parts of the business and setting market-based fuel prices, the game plan laid out by the man he replaced, market darling Roberto Castello Branco. Luna notched his most recent win with the region’s biggest equity deal this year, raising $2.3 billion by selling a stake in a fuel distributor that wasn’t part of the core exploration-and-production business.
Now, however, Petrobras’s chief executive officer faces his biggest test yet as he comes under fire from the transportation industry for raising domestic fuel prices this week for the first time during his tenure. Truckers, traditionally a strong part of Bolsonaro’s political base, are up in arms and once again threatening to strike, just three years after a work stoppage over similar issues crippled commerce, caused livestock to go unfed and stunted economic growth for the year.
“We told Luna a new increase wouldn’t be acceptable,” Plinio Nestor Dias, the president of a 20,000-member truckers union, said after meeting with Luna last week. “We were caught off guard. They’ve lit the gunpowder.”
Petrobras has a policy of regularly adjusting fuel prices to track international rates, which have surged more than 20% this year. But periods of high prices have historically resulted in the company subsidizing Brazilian motor fuels to contain inflation. If crude continues to climb toward $100 a barrel, as some investment banks are now predicting, it will put Luna under greater pressure to shield consumers and take a hit.
How Luna defends Petrobras’s finances amid pressure from truckers, the president and whatever fallout stems from any strike will help determine if the company can secure its role as a major oil supplier in a world where only the largest and most profitable projects are expected to survive the ongoing energy transition.
“We will see the acid test when Luna needs to pass on much higher fuel prices to consumers,” said Patrick Pereira, a portfolio manager at Legacy Capital, which owns Petrobras shares.
Bolsonaro, who already slashed fuel taxes earlier this year to appease truckers, has been railing against higher costs as he gears up for a re-election campaign next year. While Bolsonaro can’t directly order Petrobras to do his bidding, the government is the largest shareholder and appoints a majority of board members.
“The fuel price has to be reduced, and that’s all there is to it,” Bolsonaro said last week in a social media broadcast.
“Aligning prices with the international market is key to ensure that the Brazilian market continues to be supplied without the risk of shortages,” Petrobras’s press office said in response to a request for comment.
Brazilian asset managers including Atalaya Capital, Legacy and Ibiuna Investimentos all say Luna is off to a positive start with his efforts to sell assets and reduce debt. Investors see prospects for strong cash generation amid higher oil prices and room for further gains in the stock, which trades at a discount relative to peers.
“We took advantage of the increased political noise earlier this year to boost our position,” said Cesar Paiva, a fund manager at Real Investor in the city of Londrina. “Even if oil keeps climbing and the company doesn’t fully pass on to consumers the increase in prices, it’s at an exceptional moment in terms of cash generation, and the deleveraging process is expected to continue.”
The stock is trading at 3.8 times enterprise value to forward Ebitda, lower than its historical average and well below metrics of U.S. oil giants Exxon Mobil Corp. and Chevron Corp., according to data compiled by Bloomberg. Petrobras has been trading at a discount to American peers since about 2015 when the most recent commodities supercycle ended, and the gap has been widening in recent quarters.
While the risk of political intervention persists, the “excessively discounted” valuation and strong outlook for earnings support the stock, said Andre Lion, a portfolio manager at Ibiuna.
Lion built a position in shares of Petrobras around the end of last year and boosted holdings following first-quarter results. He expects Petrobras’s gross debt to fall to $60 billion -- the threshold that triggers higher dividends -- in the third quarter. It’s currently about $71 billion.
One of Luna’s unlikely supporters is Marcelo Gasparino, a lawyer who was elected to Petrobras’s board by minority shareholders in April. He quit the same day to pressure for additional members from outside the government, and is a candidate in a re-vote set for the coming months. For Gasparino, the mere fact that Luna hasn’t derailed asset sales has generated confidence.
“Luna is skillful,” Gasparino said. “Letting things happen is already very positive.”
Luna has also been lucky. A big chunk of domestic fuel price increases happened before he took office. Since then, a strengthening local currency has cheapened imports and reduced pressure to lift pump prices. Still, international oil markets have continued to rise and the real has slumped in the past few weeks, once again putting pressure on domestic prices to align with the global reality.
Truckers have called for a strike on July 25. Luna negotiated with the same unions as defense minister in 2018, when a work stoppage over higher fuel prices paralyzed the country, ending only when Petrobras agreed to temporarily hold off on increases. The government eventually reimbursed Petrobras for the subsidies, but it was a warning sign for investors.
“The market is curious to see what management’s reaction will be -- if it’ll stick to an independent fuel-pricing policy even under a more challenging scenario,” said Renan Vieira, founding partner at Tarua Capital, in Rio de Janeiro. “We’re waiting for this big test.”
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