Petrobras to use record Q2 profits for debt reduction, early dividends

By Peter Millard and Mariana Durao on 8/5/2021

(Bloomberg) –Brazil’s state-controlled oil company saw its earnings surge to a record for the second quarter, providing relief to investors who were rattled by a messy management change earlier this year.

Petrobras slashed its debt load and announced early distribution of dividends thanks to the robust results, triggering the biggest jump in shares since February. Credit Suisse Group AG and Scotiabank both upgraded to outperform. Shares were up 9.4% at 11:44 a.m. in Sao Paulo.

It was a moment of redemption for Chief Executive Officer Joaquim Silva e Luna. Shares plummeted when the Army general was tapped to take over Latin America’s largest oil producer and 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.

So far those fears have been unfounded. Robust fuel margins at its refining business contributed to the earnings jump. Adjusted earnings before interest, tax, depreciation and amortization, a measure of profitability, reached a record of almost 62 billion reais, according to Bloomberg data. The rally in oil prices, higher margins on domestic fuel sales, favorable tax decisions, and strong demand for electricity and natural gas amid an ongoing hydroelectric crunch boosted profits.

UBS Group AG expects the government to start using dividends paid by state-owned companies including Petrobras to finance social programs, which would make profits a priority for the government as well as shareholders. UBS expects Petrobras’s dividends to rise to as much as $15 billion next year, it said Thursday in a report.

This year’s oil-price rebound has delivered solid earnings to energy giants, many of which are printing as much profit as before the pandemic. As a result, many of Petrobras’s U.S. and European peers have been using the cash to boost dividends and slash debt. It’s a stunning turnaround for an industry that was on the ropes a year ago amid a pandemic-induced price crash.

Since late last year, Petrobras has sold more fuel oil domestically and increased output at its own thermal power plants, part of a wider policy in Brazil to conserve water levels at hydroelectric dams and avert power outages. Though the power division at Petroleo Brasileiro SA, as the company is formally known, represents a fraction of overall revenue, it was a standout. Electricity generation more than tripled in the second quarter from a year ago.

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Petrobras reported 42.86 billion reais ($8.3 billion) of net income, up from 1.17 billion in the first quarter and compared with a loss of 2.7 billion reais in the second quarter of last year, at the height of the Covid crisis. The results mark the best-ever second quarter for the company.

The strong results will allow the company to bring forward shareholder payouts of 31.6 billion reais for this year, about three times the average that was distributed in the past three years. Chief Financial Officer Rodrigo Araujo said Petrobras may pay even more dividends if it has enough cash.

“Considering our prospects for earnings and for cash flow generation in 2021, we approved the anticipated distribution of dividends,” Araujo said in a recorded video for investors.

Output from the so-called pre-salt region that holds Petrobras’s largest and most profitable discoveries continues to expand. A 180,000-barrel-a-day production vessel is expected to start this month and gradually ramp up at the Sepia field. This and other new units allow Petrobras to continue boosting output at ultra-deep fields, and compensate for production it has lost due to asset sales and natural declines at legacy fields.

Petrobras has slashed what was once the biggest debt load of any publicly traded oil company, which stood at $63.7 billion at the end of the second quarter. The company has vowed to increase dividend payments when it brings total debt below $60 billion, a target it is on pace to reach before the end of this year, Araujo said. The ongoing divestment program has helped Petrobras trim debt.

It was the first quarter under Luna, who took over in April following a row between President Jair Bolsonaro and the previous CEO about rising diesel prices. Luna has pledged to avoid fuel subsidies and continue with Petrobras’s current business plan, which calls for divesting assets including refineries to focus on its most profitable projects in the pre-salt.

“We continue to work hard, supported by decisions that are absolutely technical, and are evolving and becoming stronger,” Luna said in the earnings report.

Investors are waiting to see how strongly Luna will defend Petrobras from political intervention. The company recently denied a claim from Bolsonaro that it had earmarked 3 billion reais to subsidize cooking gas for families in need.

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