The share price of Brazil’s state-owned oil giant, Petroleo Brasileiro S.A. (Petrobras), has nosedived 41% since October, when Luiz Inácio Lula da Silva, affectionately known as Lula, defeated the right-wing Jair Bolsonaro by running a pro-environmental campaign.
Lula was sworn in as President of Brazil for the third time in his life on Jan. 1. The following day, Petrobras shares fell over 9% in New York trading.
Investors in the Brazilian oil giant—the largest oil major in South America—are concerned by Lula’s track record on managing Petrobras. According to Bloomberg, Petrobras became the world’s most indebted oil company when Lula was last in power, from 2003 to 2011, after the government’s interventionist policies forced the company to spend $40 billion subsidizing motor fuel.
But investors are also spooked by the returning president’s appointment of Jean Paul Prates, a former senator and energy executive, to take over as CEO of the state-run company. He'll become the oil giant’s fourth chief executive in under two years.
Prates, a 54-year old born in Rio de Janeiro and holding a master’s degree in energy planning from the University of Pennsylvania, previously worked in the legal department of Petrobras’s international division during the 1980s, before leaving to become an oil and energy consultant.
Despite Prates’s pedigree in the energy industry, investors fear the incoming Petrobras CEO, whose appointment is still awaiting confirmation from the board, will increase costs at the firm while reducing dividends payments. (Dividends payments at Petrobras have ballooned an annualized 145% over the past five years.)
Prates has lambasted the company’s former executives for steering the company “off a cliff." He's argued that leaders who slashed costs by shutting down subsidiaries in oil refining focued too narrowly on shareholder returns and increasing oil exploration and ignored investments in green energy.
“I see Petrobras as a company that needs to look to the future and invest in the energy transition to meet the needs of the country, the planet and the society, as well as the long-term interests of its shareholders,” Prates told reporters last week.
“All oil companies are turning into energy companies, and it isn’t just talk…None of this is happening at the right scale at Petrobras,” Prates said.
Petrobras did not immediately respond to request for comment on Prates's nomination and stated policies.
Under Lula’s instruction, Prates is also set to reform Petrobras’s pricing strategy, which is currently based on international oil prices, in favor of the government setting a domestic guideline for oil prices. Critics of the change fear a return to Lula’s previous crippling subsidies scheme.
However, Prates has said that changes to Petrobras’s pricing will be done slowly to ensure there are no “shocks,” and the government recently extended a tax break afforded to Petrobras, which Prates says will give the company enough cushion to adjust its pricing strategy.
I suspect investors are right to exit Petrobras in the short term, as Prates’s plans will certainly increase costs and decrease dividends. But the companies plunging shares are just another example of how short-term investor sentiment fails to align with long-term development goals.
Prates is right. All oil companies need to transition into energy companies, cutting down fossil fuels and boosting renewables. The cost of making the transition is almost always less than the cost of not.
Eamon Barrett
greeninc.news@gmail.com
@eamonbarrett88
