We have previously discussed here the overall investment community’s criticisms of Petrobras (NYSE: PBR) this last year: be it Itau’s downbeat expectations, the company’s lack of efficiency and focus, its non-attractiveness to investors, or its constant delays that “kills” its suppliers that so dearly depend on its operations (Lupatech anyone?).
But don’t get us wrong: the state-owned company obviously has enormous potential and reserves, and perhaps someday (after 2020) it may become the largest oil company in the world. It is just that it remains to be seen if the current business model will work for investors. After all, isn’t the Brazilian government its largest shareholder?
So far, investors have only been punished. And it seems like the Director of the Brazilian Center of Infrastructure (CBIE), Adriano Pires, corroborates with our views (via Brasil Economico) and provides some background on how the government’s foothold destroys shareholder value.
Historically, the price of fuel in Brazil has always been used as an instrument of economic policy, both in order to encourage the country’s development and, mainly, to control inflation. However, in no time in recent history has Petrobras been so severely punished by this government intervention as in the last eight years.
During this period, the company’s opportunity loss may have amounted to R$12 billion as a result of the difference between the price the company charges for oil (set by the government) and the international price of the commodity. And this issue is aggravated by the recent and growing need to import fuel, since by effectively buying oil at a higher price in the international market these opportunity losses are officially materialized.
The history of the fuel subsidy in Brazil dates back to the 60s with the creation of the Oil Account (“Conta Petroleo). The initial objective of the oil account was to equalize the oil prices in the country, in order not to make an impact on inflation. This account has become sort of a “buffer” to price fluctuations in international oil markets.
The practice of subsidizing fuel consumption in Brazil is old, and this government subsidy used to be accounted for in the “Conta Petroleo”, which provided some clarity on the amount of the “grant” and the grantor (in this case, the National Treasury).
Today, the situation is different, but only on paper. Since 2001, the oil price charged by Petrobras is, in theory, floated freely. But in practice, it is not. Petrobras claims that it has a rule for price adjustments which are not transparent and serve as a vehicle for government subsidies to fuel prices in the domestic market.
Therefore, this process of “expropriation” of Petrobras by the government has exacerbated in recent years, because there is no way to quantify the actual losses to shareholders by this “subsidy”, which is actually made with the company’s own cash.
So, the reader may ask, if the oil price is subsidized, why gas prices are so expensive for the Brazilian consumer? Quick answer: government taxes (full answer here). In other words: the government wins, the consumer loses.
What about the stock and ROI? See the graphic below and answer it yourself. And again, the government wins, the investor loses.