Petrobras: Balancing Risk and Opportunity in Brazil's Oil Industry
Petróleo Brasileiro S/A - or simply called Petrobras - is the leading player in oil and gas production in Brazil. The majority-state-owned company has a net revenue of R$ 452 billion (approx. USD$90bn), outputs approximately 2.77 million barrels of oil equivalent per day, and is a publicly-listed company traded on the New York Stock Exchange (NYSE:PBR), Nasdaq (NASDAQ:PBR), and the London Stock Exchange (LSE:0KHP), and several others. Despite its relevance to the global energy markets and its considerable growth potential, investors’ sentiment towards Petrobras usually contains extra grains of salt. The company is often embroiled in domestic wrangles and power struggles that shed uncertainty about its corporate governance and was at the centre of a major corruption scandal involving high-rank Brazilian policymakers in 2015.
After the election of Lula da Silva as president, markets again reacted badly due to a perceived high potential for undesired political influence over the appointment of Petrobras’ Board of Directors, for changes in its dividend distribution, and a revision of the company’s pricing policy (which currently follows a parity with international import prices). One year later, a scanning of those three issues and of the newly appointed Board might still prove revealing of Petrobras' future and better prepare investors to hedge against associated risks.
Currently, the State-owned Companies Act (2016) prohibits figures with a potential conflict of interest due to previous positions inside public administration from being appointed to the Board for a period of 3 years after leaving the previous function, which is also endorsed in Petrobras’ statute. A Bill reducing the “quarantine” period to 1 month is stalled in the Upper House of Congress since 2022, prompting many to wonder if the Bill’s approval could be pushed to ensure greater coalition support in times of political turbulence. Despite being a possible strategy, it is far from being the likely one. A Supreme Court decision has already suspended the proposed 3-year quarantine period of the Bill, and 3 of the government’s 6 appointees were confirmed on the Board despite alleged concerns about their ties with partisan politics. However, other bills and reforms are among Lula's top priorities with Congress, making it unlikely that he would create an unnecessary conflict with the Upper House over Petrobras, especially when opposition forces are strengthened.
Acting as Petrobras's CEO is Jean-Paul Prates, who has vaguely commented on the possibility of changing the dividend distribution policy, but both Lula’s and Bolsonaro’s defence for greater taxing in dividend yield distributions likely does little to appease markets. Still, a recent judicial attempt of halting Petrobras’s dividend distribution shed even more uncertainty about how alternative ways of interference - ones that do not even involve the Board’s discretion - can be overreaching, indicating a high likelihood of taxation in the future.
The potential for a change in the company’s policy of maintaining parity with international oil prices also cannot be discarded, as key figures inside the Board have signalled they desire its revision. Nevertheless, in a continued scenario of high oil prices due to external shocks, the Board is likely to be interested in retaining a part of Petrobras’ profitability by not announcing major changes in the parity policy for the near future.
While the prospects for stable dividend yield distributions and insulation from rent-seeking dynamics appear less optimistic, posing increasing risks for investors, Brazil's potential to become a major player in clean energy production presents an opportunity. Petrobras is actively exploring cutting-edge technologies in renewable energy markets, such as wind-powered energy and green hydrogen production, which could enhance its long-term profitability. While the company’s issues span across multiple incumbencies and require careful assessment of long-term tolerance for loss, the most risk-appetite investors can still find creative ways to offset the balance and - with some stroke of luck - profit from the undertaking.
Photo credit: Global Business Outlook