Petroleo brasileiro

State-run Brazilian oil giant Petroleo Brasileiro SA (NYSE:PBR) (NYSE:PBR.A) shocked markets by reporting a loss for its June quarter while all analysts expected a profit.

The company reported a net loss of 1.35 billion reais (about $666 million), while analysts in a Bloomberg survey expected an average of 2.94 billion real profit. Significantly, it was the first quarterly loss declared by the company in almost 13 years, and not surprisingly, the ADR opened with a sizable downside gap before recouping losses – it currently trades at $20.46, up 0.64 percent.

A major reason for the loss was the depreciation in the value of the Brazilian currency – the real, which lost almost 9 percent of its value over the quarter. A lot of PBR’s equipment and services are paid on U.S. dollars, and the weak real added to the costs payable. In addition, the company has significant borrowings in the international markets, and the weak real also pushed up the liabilities on servicing these debts. This factor alone caused a $3.6 billion charge in the accounts. Chief Financial Officer Almir Barbassa said in a May 22 interview, “We finance ourselves from the international capital market, so our exposure to the dollar is high. We have to recognize the loss.” The financial losses will “have an impact” on the amount of dividends the company will pay this year, Barbassa warned.

Another factor that affected the results, was the policy of the Brazilian government to make the company subsidize the oil consumption within the country – there is a large differential between the cost of imported fuel and the domestic prices fixed by the government. This accounted for a loss of nearly $6.2 billion on the books. “Since I became president of Petrobras five months ago, I’ve continued reiterating our commitment to parity with international prices,” Chief Executive Officer Maria das Gracas Foster said. “These adjustments are necessary to finance the business plan.”

Another major adverse factor, was an increase in exploration costs by nearly $1.35 billion, due to the increased incidence of write-offs account for dry well holes. The company wrote off 41 dry or non-commercial oil wells in the quarter, resulting in a cost of 2.74 billion Brazilian reais ($1.35 billion).  One explanation provided for the sudden increase is that a number of schedules for assessing well status may have coincided during the quarter. “We don’t expect to have a similar concentration [of well write-offs] in future quarters,” Petrobras Director of Exploration and Production, Jose Formigli, said on the conference call.

The company’s operations were also hampered by a fall in oil and gas output, and mounting refining losses. Second quarter output fell 1.1 percent, compared to last year, due to oilfield shutdowns and maintenance outages.