Petrobras' problems are becoming Dilma’s problems.
Brazil’s oil and gas major, Petrobras, can do no right. And now President Dilma Rousseff is being blamed for the problems. Of course, she is being blamed by politicians who don’t want to see her re-elected in October. They probably won’t succeed at dethroning her, but one thing is certain: the deterioration of the shining star of Brazil’s state owned enterprises happened on her watch. This election season, Dilma isn’t the only one in the cross hairs. Petrobras is now her problem, too.
Not long ago, as in 2007, Petrobras was heralded as the Latin America Aramco, finding oil deep under the ocean floor far off the coast of Rio and São Paulo states. Goldman Sachs once put a $60 price target on the stock in early summer 2008. Today, Petrobras shares trade under $12, and its market cap is smaller than Colombia’s EcoPetrol.
Over the last several weeks, Petrobras has been inundated with allegations of corruption. Chalk it up to the election cycle, but bad news has sprung a leak in the state energy giant. It’s going to get worse before it gets better.
The Federal Police have around five investigations out on Petrobras, not to mention one at the Congressional Budget Office in Brasilia. The crises goes beyond politics, though, and hits where investors feel it most. The company has lost 51% of its market cap in the last three years and is now valued at $75.5 billion.
Last year, Petrobras’ debt load hit $22 billion, a 30% increase from 2012 levels. Petrobras’ high debt caused the company’s fiscal counsel to warn executives of a possible credit rating downgrade. Petrobras is investment grade. Ratings downgrades mean higher risk premiums, which makes it more expensive for a company to borrow.
It’s one thing if the debt was soundly acquired. Most of it was, of course. But some of the debt was seen as possibly being siphoned off by unscrupulous technocrats at Petrobras through acquisition deals gone wrong.
One of the biggest problems at Petrobras today is the nearly $1 billion it paid for the Pasadena refinery in Houston in 2006, a deal that the government admits was improperly handled by the company. Two years prior, the same refinery was sold to Belgium firm Astra Oil for less than $50 million, Estado de São Paulo newspaper reported on Sunday. Even Dilma said this week that Petrobras failed on its due diligence to acquire the refinery, which they are currently trying to sell, undoubtedly at a loss. Unfortunately for her, she was a member of Petrobras’ Board of Directors at the time of the purchase.
On Friday, one of Petrobras’ former executive directors, Paulo Roberto da Costa, was arrested by Federal Police on allegations of money laundering while at the company. Costa was in charge of the Pasadena deal. Government entities overpaying for goods and services is a classic way politicians and well-connected executives can steal from the state.
The political opposition is eating this up. Social Democrat Aécio Neves, a presidential candidate, has been using the Petrobras corruption story line to his advantage. He’s been blaming Dilma in the senate all week.
“Since (Dilma) assumed the presidency, the losses, the decline in market share between Petrobras and Eletrobras is over $100 billion,” he said, including the troubled electric power holding company that is up to its eyeballs in debt building out the controversial Belo Monte dam in the Amazon.
“This case demolishes (Petrobras),” says Social Democrat and party leader in the lower house of congress, Antonio Imbassahy. “Dilma is someone who was created by the marketing department of the Workers’ Party. Good management on her behalf was always a fiction.”
Dilma was the hand-picked successor of Brazil’s most popular president since the dictatorship years, Luiz Inacio Lula da Silva. He put her in charge of the Ministry of Mines and Energy, before moving her to his Chief of Staff and setting her up to take over where he left off in 2009. The ex-leftist guerrilla leader was more activist than oil woman, but Petrobras was never viewed as a traditional corporation, not in Brasilia and not by the market. Petrobras is more of a policy tool of the government. And now, it appears that it has been used as a cash account for some people inside the firm if investigations turn out negative for Petrobras.
Another Presidential candidate, Eduardo Campos of Brazil’s Socialist Party, said on his Twitter account that “It’s no surprise Petrobras is going through what it is today, the worst crisis in the company’s history.”