Petróleo Brasileiro S.A. – Petrobras (NYSE:PBR) is receiving billions of reais from Brazil’s fuel-subsidy programs at a time when elevated international diesel prices are making its domestic pricing strategy increasingly important. The company’s board recently approved joining a new government subsidy program worth R$1 per liter of road-use diesel A for 30 days, with the possibility of an additional 30-day extension. The new benefit is cumulative with an existing R$1.12-per-liter subsidy.
That potentially puts the combined support at R$2.12 per liter while both programs are in effect. Petrobras said, however, that the effective signing of the participation agreement for the new program remained conditional on publication and analysis of the regulation required to operationalize the subsidy.
Bull Case
The structure of the subsidy gives Petrobras an unusual way to respond to higher fuel prices without immediately raising what distributors pay. Earlier in September, Petrobras increased its diesel price to distributors by an average of R$1 per liter while simultaneously providing a discount of the same amount, as a result of which the company’s prices to distributors remained unchanged. Under the government’s subsidy mechanism, participating producers and importers deduct the subsidy from their selling prices before being reimbursed by Brazil’s oil regulator, ANP.
More importantly, government reimbursements are already reaching Petrobras. On September 19, the company said it had received R$448 million under a gasoline subsidy program for sales between July 16 and July 31, and at that point, cumulative receipts from diesel, gasoline. and LPG subsidy programs stood at R$9.9 billion.
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That total has increased since then, with the company reporting on September 25 that it received another R$2.3 billion related to diesel sold between July 16 and July 31, bringing cumulative amounts received through the three subsidy programs to R$12.2 billion. The size of those receipts makes the programs financially relevant for shareholders, particularly because reimbursement timing has mattered before.
Bear Case
The subsidies do not remove the underlying pressure created by the gap between international diesel prices and Petrobras’ domestic prices. In a separate September 16 report, Reuters said the gap between international prices and Petrobras’ diesel prices had reached record levels. According to Brazilian fuel importers’ association Abicom, Petrobras’ diesel was R$3.89 per liter below import prices at the time. Brazil relies on imports for roughly one-quarter of its diesel consumption, and Reuters reported that the widening gap was prompting independent importers to delay purchases.
There is a direct financial concern for Petrobras as well. Reuters reported that when the company imports fuel at higher international prices than it charges domestically, the resulting margin squeeze hurts its profitability. The additional government support is also temporary. The new R$1-per-liter subsidy is initially set for 30 days and can be extended for another 30. Petrobras says its commercial strategy seeks to preserve market share, optimize its refining assets and pursue sustainable profitability while avoiding the immediate pass-through of short-term volatility in international prices and exchange rates to domestic fuel prices.
Conclusion
For Petrobras shareholders, the most important number is no longer the subsidy rate itself. It is the R$12.2 billion the company says it has already received across the diesel, gasoline and LPG programs. Those reimbursements provide support while Petrobras navigates a difficult gap between domestic and international diesel prices. But the latest R$1-per-liter program is temporary, while the underlying exposure to international fuel prices remains.
That makes the durability of the current arrangement worth watching, as the subsidies are providing Petrobras with billions of reais in reimbursements today, but how the company manages domestic diesel pricing once that temporary support changes could matter much more over the longer term.
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This article is originally published at Insider Monkey.
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