Brazilian Real's 3Q Slide Pilfers Petrobras Profit

RIO DE JANEIRO (Dow Jones Newswires), Nov. 12, 2011

Brazilian federal oil company Petroleo Brasileiro joined the growing list of local companies hurt by the real currency's stunning slide in the third quarter, as its net profit slid 26 percent on the year despite higher international oil prices.

Petrobras late Friday reported a third-quarter net profit of 6.34 billion Brazilian reais ($3.64 billion), down from BRL 8.57 billion in the year-ago quarter despite advancing revenue on higher oil prices. Analysts had expected Petrobras to record a net profit of BRL 5.01 billion in the quarter.

"The foreign-exchange effect was the great reducer in this quarter's results," said Almir Barbassa, Petrobras's chief financial officer. The real tumbled nearly 19 percent against the U.S. dollar as Europe's ongoing debt crisis and concerns about global economic growth rattled financial markets. That resulted in a BRL 6.5 billion foreign-exchange loss during the quarter, the executive said.

The impact of foreign-exchange volatility has been a running theme among Brazilian corporations releasing third-quarter earnings in recent weeks. While local companies enjoyed higher prices for their products--especially commodities such as oil and iron ore--that pushed revenues higher, the swift decline in the real caused borrowing costs to soar.

"The foreign-exchange effect comes from the exposure of liabilities that are linked to exchange rates," said Barbassa, who pegged Petrobras's liabilities denominated in foreign currencies at about BRL 50 billion. Given Petrobras's average debt profile of seven years and its ample cash position, Barbassa said the company could weather the storm without any real damage to its books.

"Foreign-exchange fluctuations are the fruit of various elements. [Foreign-exchange rates] rise and fall," Barbassa said. "It's really an accounting effect, taking from one area and giving to another."

The rest of the company's financial data showed the benefits of higher international oil prices and strong domestic fuel demand, although rising imports continued to undermine refining operations. Petrobras reported net revenue of BRL 64.2 billion and earnings before interest, taxes, depreciation and amortization, or Ebitda, of BRL 16.67 billion. Both figures topped year-ago results and analysts' expectations. Analysts had estimated net revenue of BRL 62.31 billion and Ebitda of BRL15.77 billion.

But Petrobras once again fell short of the gains posted by rivals such as Exxon Mobil (XOM), Chevron (CVX) and Royal Dutch Shell (RDSA, RDSA.LN), which all posted net-profit growth of greater than 40 percent. While international oil prices were nearly 50 percent higher than the third quarter last year, earnings were undercut because Petrobras didn't pass the price increase along to consumers at the pump. Petrobras should be able to recoup some of the difference in prices in the fourth quarter. Starting Nov. 1, the company raised gasoline and diesel prices at the refinery gate by 10 percent and 2 percent, respectively.

Compounding the drag on profits caused by Petrobras's pricing policy was stronger domestic demand for gasoline and diesel fuel that forced Petrobras to increase imports, Barbassa said. The increase in imports could cost Brazil its status as a net oil exporter. Domestic consumption, which typically tracks gross domestic product growth, well outpaced activity in Latin America's largest economy to grow 9 percent in the third quarter, Barbassa said.

The country's second-consecutive lackluster sugar-cane harvest has also led to higher ethanol prices, which causes drivers of flex-fuel cars to opt to fill their tanks with gasoline rather than the alternative biofuel, Barbassa added.

The result was a BRL 3.16 billion loss in Petrobras's refining operations, which posted a BRL1.3 billion profit in the year-ago period. In the second quarter, the refining segment lost BRL 2.28 billion.

The company's locally traded shares closed 2.1 percent higher at BRL 21.96 on the Sao Paulo Stock Exchange ahead of the release. In New York, the company's American depositary receipts ended 0.7 percent higher at $27.49.

Copyright (c) 2011 Dow Jones & Company, Inc.


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