Petrobras Privatization Politically Challenging Despite Upside

Brazil’s President Jair Bolsonaro has approved his government to advance initial plans related to a potential privatization of state-owned oil and gas producer Petrobras.

Pulling off such a deal would be a political challenge but does offer an upside related to Petrobras efficiencies and trading multiple re-ratings, analysts say.

Still, it’s uncertain how a privatization process would proceed since it would require altering Brazilian oil-related laws, UBS Brazilian-based analysts Luiz Carvalho, Matheus Enfeldt and Tasso Vasconcellos wrote June 2 in a research note to clients. Such changes “could face significant opposition in Congress, but that could advance,” they wrote.

UBS views plans announced by Bolsonaro to dismantle Petrobras as potentially providing some benefit since it “would eliminate synergies from current operations, particularly in Sao Paulo and Rio de Janeiro.” Re-ratings of Petrobras’ current enterprise value-to-EBITDA trading multiples to a similar average for Latin American equities could lead to stock upside of 35%. When compared to emerging markets and majors that stock upside could approach 87% and 123%, respectively, according to UBS.

Brazil remains on the radar of many in the U.S. and other investors chasing opportunities across the upstream and downstream sectors, among others. Integrated oil companies continue to eye opportunities in the South American country either related to Petrobras’ ongoing asset divestments, the opening of Brazil’s gas market or the prolific pre-salt region offshore. 

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Rio de Janeiro-based Petrobras is Brazil’s largest producer and continues to enjoy monopolies across various sectors despite ongoing efforts to reduce ownership stakes in numerous refineries and other noncore assets. Petrobras reported recurring net income of $8.4 billion in first-quarter 2022 while a new dividend policy commenced this year in line with the company reducing its gross debt below the $65 billion level. 

Beyond Petrobras’ strong financial results driven by solid operational results and robust commodity prices, the company continues to come under pressure related to its fuel oil pricing policies. Bolsonaro has already pushed out three Petrobras CEOs over disagreements regarding fuel prices and has recently complained on Twitter that Petrobras wasn’t performing its social responsibilities to the country.

Ownership Structure

This week, Petrobras announced receipt of a letter from Brazil’s Mines and Energy Ministry requesting qualification of the company under the country’s Investment Partnership Program, linked to the Economy Ministry. This effectively gives permission for the government to start “specific evaluation studies for the company's privatization,” Petrobras said May 30 in a statement on its website. 

Petrobras’ “bylaws clearly state that we may have our activities guided by the Brazilian federal government in order to contribute to the public interest that justified our creation,” the state company revealed in its 2021 annual report.

The move to privatize Petrobras could provide Bolsonaro with some financial gains but could come at the cost of losing control to appoint company directors, if the changes were to make it through Congress. UBS views any privatization in 2022 as unlikely, but expects the process could see some traction in after 2023 depending on the results of the presidential election on Oct. 2. Still, UBS believes “the process may be more advanced than the market may currently consider.”

In Brazil, Corporate Law and Law No. 13,303/16 stipulate the Brazilian federal government must own at least a majority of Petrobras’ voting shares. “Although the Brazilian federal government does not have different voting rights than our other shareholders, as long as it holds a majority of our voting share, any change in our control would require a change in applicable laws,” Petrobras’ announced in its annual report.

As of Feb. 28, Petrobras had 13 billion shares outstanding, comprised of 7.4 billion common and 5.6 billion preferred. Of the common or voting shares, Brazil’s federal government owned 50.26%. In terms of Petrobras’ preferred shares, approximately 81.5% were owned by other investors while none was owned by the federal government.