When Roberto Castello Branco took over the management of Brazilian oil group Petrobras a little over two years ago, he knew precisely what message he needed to send: the days of government interference were finished.
But if preventing government intervention was the only measure of success, Castello Branco’s stint as managing director of Brazil’s largest company ended in failure.
At the end of last week, the executive trained at the University of Chicago was ousted by Brazilian President Jair Bolsonaro and will likely be replaced in the coming weeks by a 71-year-old reserve general who has no experience in oil and gas.
The shock brought down Petrobras’ shares more than 20 percent Monday, wiping out billions of dollars from its market cap, as investors grappled with the prospect of a new inexperienced leader and a Brazilian government again using the oil group to further its political and economic interests.
“We did not expect this intervention at all,” said Daniel Rummery, partner at Brunel Partners, who advises foreign investors in Brazil. “Our point is less Petrobras and more on where the government is heading. Putting an army general in charge is a clear sign for the market.
Bolsonaro has shown the door to Castello Branco following a dispute over gasoline and diesel price hikes, which the populist president says were hurting some of his loudest voters – the thousands of Brazilian truck drivers .
Investors are now waiting to see how his proposed replacement, Joaquim Silva e Luna, will handle the problem and whether he will sacrifice the group’s recently restored credibility with investors in order to appease the Brazilian president.
Silva e Luna – a retired general who currently runs the Itaipu Binacional hydroelectric generator – has previously hinted that his predecessor’s policy of setting fuel prices in line with international levels could be suspended and price limits restored. He said he believed state-controlled companies should “consider social issues”.
“We see this ad [of the general’s appointment] as a negative signal, both from the point of view of governance – taking into account the risks for the managerial independence of Petrobras – and because this implies risks for having a fuel price policy in line with international price references ” , said brokerage XP, which downgraded its Petrobras rating from neutral to sell.
When Castello Branco took the job two years ago, he clung to the idea of managerial independence as he recognized its importance to investors.
Petrobras was founded in 1953 as a state monopoly before selling shares to investors. It is now a publicly traded company in São Paulo and New York. The Brazilian government still owns 36.8% of Petrobras and 50.5% of the voting rights.
For years, under the former Dilma Rousseff administration, the company was forced to keep prices low in order to keep inflation under control. Castello Branco estimated that the efforts cost Petrobras some $ 40 billion and contributed substantially to a pile of debt that at one point threatened to subsume the company.
Under the Rousseff administration, the company was also at the center of the vast Car wash corruption scandal, which caused the company’s stock price to plummet and resulted in hundreds of millions of dollars in fines.
Petrobras began to regain his stature under Castello Branco. In 2019, the Rio de Janeiro-based company reported a profit of $ 10 billion on revenue of $ 76 billion – a turnaround from 2015, when the company recorded a loss of nearly $ 8 billion. $ 5 billion on a turnover of $ 97 billion.
The company also managed to reduce its debt to $ 63 billion in 2019 from $ 126 billion in 2015, allaying investor concerns.
Petrobras has received applause from industry analysts for its technical prowess as well as its abundant reserves of high-quality “pre-salt” oil located in the deep waters off Brazil’s southeast coast. Overall production last year reached 3.7 million barrels per day, up from 3.5 million in 2019. Analysts believe this rate is likely to increase in the coming years.
However, these achievements now face risks with the dismissal of Castello Branco.
“There is unease because the company has already gone through a big trauma,” said a Petrobras employee who asked not to be named. “It was a painful process to rebuild his reputation and the self-esteem of the employees. Any attempt at interference brings back a feeling of insecurity. “
Central to concerns is cash flow, which could be affected if Silva e Luna decides to cap diesel and gasoline prices, according to rating agency Fitch. Its investment in pre-salt oil fields could also suffer a long-term setback if cash flow is choked, said Luiz Caetano, investment analyst at broker Planner.
“If there is a big change in pricing policy, investments will certainly suffer,” Caetano said.
The turmoil at the top also risks undermining the company’s plans to sell billions of dollars in assets, including refineries and pipelines.
“Sales processes are long and complex processes. The point is, it can impact buyers’ lack of interest. How will you value the asset if part of the business changes? Said an employee.
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On Tuesday, Petrobras’ board of directors will meet to discuss the appointment of Silva e Luna and the government’s request for a shareholder vote on the matter.
“Because Silva e Luna is a soldier, it is clear that he will be well aligned with the interests of Bolsonaro. And his first statements didn’t help much either, ”said Luis Sales, analyst at Guide Investimentos.
However, the former captain of the right wing army may find that exerting influence over the company may not be straightforward.
“The risk is that Bolsonaro will quickly quarrel with this General Luna that he is putting in place,” said Marcelo Mesquita, member of the board of directors representing minority shareholders.
“The person who is there [as CEO] can’t do what they want. It is a collegial council, there are rules, norms and standards, technical committees.
Additional reporting by Carolina Pulice