Petrobras is back in the headlines. Now the issue is related to the purchase of a refinery in Pasadena in the State of Texas, US. How will your business be impacted by this issue? Keep reading to learn more.
Big in Brazil, but How big?
Petrobras is big in Brazil.
Everything that happens to Petrobras is relevant because it directly impacts the Brazilian economy.
Petrobras is a massive state-owned energy company that has a major influence on the BOVESPA stock exchange, representing roughly 8% of the IBOVESPA index portfolio. Its revenues in 2013 were of about US$ 10.0 billion. A global company present in 25 countries, it has approximately 85K employees and has a large ecosystem of suppliers, moving all sectors of the Brazilian economy.
Domestically, Petrobras influences virtually every supply chain in all productive sectors in the country. Its commercial strategy directly affects production and transportation costs in the Brazilian market by influencing base fuel prices, and how alternative fuels are used, thereby influencing the cost of living across the nation.
The Pasadena Nightmare
Pasadena comes from the name of a refinery bought by Petrobras a few years ago in the state of Texas, US. The Pasadena acquisition is being considered by far one of the worst financial transactions in the Petrobras history.
In a nutshell, the company bought 50% of the refinery, leaving the remaining half with Astra Oil, a trading company from Belgium. The partnership went sour and, after a judicial dispute, Petrobras bought the remaining shares to become the sole business owner. The Brazilian company spent US$1.85B (i.e. Billion, with big B) to acquire an outdated refinery with the processing capacity of a mere 100,000 barrels a day. The refinery was later discovered to be worth a mere US$180 million.
The issue escalated quickly when a row of high profile top-executives and politicians were asked to explain the rationale for this extremely expensive acquisition to Congress. Amongst them was President Dilma Rousseff, who was the chairwoman of the Petrobras board of directors at the time of purchase.
Government opposition went hysterical; inquiring regarding how much political interest was a factor in paying the exceptionally high price for Pasadena. They accused the government of using Petrobras as a maneuvering tool to facilitate domestic and international political interests without considering the company’s long-term health and profitability.
In early April, Federal Police agents raided Petrobras headquarters in Rio to recover documents related to the money-laundering investigation, in other words, turning things even more ugly.
How will Pasadena affect your business in Brazil?
In terms of direct impact, if you work with Petrobras or are partnered with a company that directly works with Petrobras, you may expect a higher level of scrutiny in your contract negotiations. One of the eye-catching issues in the Pasadena case was a fine-print type clause found in one of the agreements (more specifically, a mandatory buy-out clause) that drastically increased the company losses when the deal went bad. With this, I’m sure Petrobras lawyers will be going over every contract with a fine tooth comb from now on to avoid any legal traps. So, expect longer negotiations with delays on contract legal reviews because Petrobras will be more closely scrutinizing the fine print in the contracts it is signing.
From a political perspective, we are in an election year. Expect to hear more about this issue in the press and during the election campaign. The main theme that will be discussed will be about how much Petrobras is being affected by political interests and how much this is hurting the ability of the company to carry on solid business decisions. Remember that the Brazilian Government is a key shareholder in the company and has control over major company decisions.
Your organization more than likely won’t be impacted by the political discourse, but you should watch developments closely to learn how these types of crisis are typically dealt with by Brasília – in other words, with considerable use of political maneuvering and damage control.
It is worth noting that Petrobras is still a solid business. The Pasadena issue may keep causing some stir among the company top-executives and President Rousseff, but I would be surprised to see any ongoing damage to company business. In Petrobras terms, Pasadena is more like a love story gone bad. It’s not a legal divorce.
If you are interested in the company ability to honor its commitments, monitoring macroeconomic risks may be a better predictor for short and mid-term performance. Gas prices are a significant component of how inflation indexes are measured in Brazil. In the past, the government has pressured Petrobras to keep gas prices unchanged to avoid inflation peaks, causing considerable profit losses for the company. Along the same lines, fluctuations in the Real exchange rates can have a major impact on the company’s cash flow due to its global nature. So, if you do business with Petrobras and want to monitor its financial health, better have your eyes open to systemic risks and trends, such as the inflation and foreign exchange rates in Brazil.
This is my editorial for this week. I hope this was useful. Please reply to my email and let me know!
Have a great day and warm regards,