Brazil's government controlled hydrocarbons company Petrobras said first-quarter profit fell 38% as oil prices dropped and costs rose. Net sales rose 8.4% to 38.98 billion reais (US$ 19.44 billion) but net income dropped to 4.13 billion reais (US$ 2.05 billion). The company made 6.68 billion reais (US$ 3.33 billion) in the first quarter of 2006.
"Costs are rising and the company doesn't raise prices to cover them," said Luiz Otávio Broad, oil and gas analyst with Agora CTVM, Brazil's largest stock brokerage.
While Petrobras hasn't raised Brazilian gasoline and diesel prices for 20 months, aviation fuel, fuel oil and naphtha fell along with an 8.3% slide in world oil prices.
Meanwhile, the cost of oil platforms, labor, and steel pipe and other goods and services are soaring with Petrobras' operational costs climbing 58% in the quarter. Oil prices averaged US$ 58.23 p/b in the quarter, compared with US$ 63.48 a year earlier.
Petrobras Chief Financial Officer Almir Guilherme Barbassa said the board approved a 2-for-1 stock split on the company's American depositary receipts. According to a statement sent to U.S. and Brazilian regulators, after the split, each ADR will represent two Brazilian shares of Petrobras, down from four currently.
Last April 11, Brazilian president Luiz Inácio Lula da Silva, told investors they had to accept the government's plan to use the company to promote its economic development goals. Lula spoke at an event where Petrobras signed a contract with a Rio de Janeiro shipyard.
Lula da Silva won election for the first time in October 2002 on a platform promising to revive Brazil's ship-building industry. Petrobras is spending US$ 2.5 billion to build 26 tankers and support ships in Brazil.
The Lula da Silva administration government has also moved to have Petrobras expand its electricity generation capacity and gas-pipeline system to reduce the chance of energy shortages.
The gasoline and diesel price freeze has helped control consumer price inflation, and laws requiring Petrobras to use alternative fuels – a quarter of all gasoline sold in Brazil is made up of ethanol – have helped farmers.
Barbassa said the company has no reason to increase prices of its main products, such as gasoline and diesel fuel, because the trend for prices doesn't justify it.
"We don't change our domestic fuel prices on every fluctuation in world prices," he said in an interview. "I see no reason to raise or lower prices right now."
Earnings before interest, taxes depreciation and amortization, or EBITDA, the most common measure of the company's ability to generate cash from operations, dropped 22% to US$ 11 billion reais from US$ 14.1 billion reais a year earlier."
However Barbassa said margins may remain lower than in the past as the company moves to expand abroad. Commercial refining margins at its Pasadena, California refinery will be lower than in Brazil as the company does not have its own source of crude oil and will buy from the market, including Petrobras.
"Investors approve efforts to expand," said Paulo Roberto Costa, head of refining at Petrobras, adding that "margins on trading are lower but if we want to expand we have to go into these businesses."
Petrobras' domestic oil and gas production rose 3% from a year earlier. The company produced 1.8 million barrels a day compared with 1.75 million last year. Total world output climbed 1% to 2.31 million barrels a day.
A decline in the value of Brazil's real against the dollar also boosted financial costs, reducing the local-currency value of dollar-denominated oil and fuels exports. Currency exchange-related losses were 736 million reais compared with a gain of 270 million reais in the year-earlier period.
Brazil's real averaged 2.11 to the dollar in the first quarter of 2007, which is 3.7% less than the 2.19 to the dollar average a year earlier.