How the government’s ‘overrun’ brought down Petrobras shares – 03/16/2024 – Market

The political confusion that caused billion-dollar losses in Petrobras shares began before the release of the state-owned company’s balance sheet, which was accompanied by the announcement of the decision to withhold extraordinary dividends from the 2023 profit.

The ministers of Mines and Energy, Alexandre Silveira, and the Civil House, Rui Costa, according to the Sheet found out, they approached President Luiz Inácio Lula da Silva (PT) to defend the retention of extraordinary dividends, arguing that the company needs to have cash on hand to invest more.

The ministers’ initiative, which went against the company’s strategy, considered an internal opinion pointing out that the possible distribution of dividends could have an impact on the company’s debt indicators, harming future investments.

This was, however, just one of the scenarios outlined.

Based on another scenario, Petrobras management proposed distributing half of the year’s R$43 billion in excess profit. The president of Petrobras, Jean Paul Prates, had already signaled to the market that he would distribute some value.

In an interview to detail the 2023 balance sheet indicators, he once again said that he had proposed a Solomonic decision. However, the company’s proposal was defeated at the board meeting with a vote in favor of retention by five of the six Union nominees on the board, following instructions from the ministers.

The divergence between Prates’ votes and those appointed by the government helped to undermine Petrobras’ communication process with investors. Later statements by Lula, criticizing the market and defending more investments, worsened the perception of conflict.

In February, Prates took to social media twice to celebrate record highs in the value of the state-owned company’s shares. A sign, according to him, that long-term investors felt safe to bet on the shares.

“Friday without a record? No, it’s not déjà-vu”, he joked on March 16, when celebrating the second record of the month, when common shares (with voting rights) surpassed the barrier of R$44.20. Days earlier, he had highlighted that the company’s market value had doubled since the beginning of the government.

The feeling of euphoria began to cool at the end of the month, after Prates told Bloomberg that investors could expect “caution” with dividends. Message received, on the day the balance sheet was released, most analysts did not predict the value that would come, but expected some amount.

The complete withholding of extraordinary dividends associated with the lack of details about the decision gave rise to a series of situations questioned by experts.

First, Lula complained about the “crying” of investors; afterwards, Silveira and the Minister of Finance, Fernando Haddad, spoke on behalf of the state-owned company. Haddad was also taken by surprise and joined the discussion to put out the fire.

Behind the scenes of the government, the assessment in the days following the stock collapse had two dimensions.

First, the President of the Republic had been misled by the ministers’ proposal, since the Corporation Law does not allow the allocation of extraordinary dividends for investments.

Secondly, there were those who saw Costa and Silveira’s maneuver as another attempt to weaken Prates at the head of the oil company — and so much so that rumors about the fall of the president of the state-owned company ran wild following the release of the balance sheet.

The backdrop of this clash of heads at the top of the government sours the business environment in a way that has not been seen in a long time.

The Lula government’s attacks are not limited to the state-owned Petrobras. It also extends to the privatized Eletrobras and Vale, with impacts on their shareholders. The latter has also been in the spotlight in recent weeks, amid confusion over a change in command.

Discomfort has set in among investors, with warnings about how the management of the state-owned company and other companies coveted by the government could be affected by Union decisions.

A survey carried out by consultant Einar Rivero shows that Petrobras and Vale, the most liquid companies on B3, lost R$85.5 billion in market value between March 7th and 15th, leading the Stock Exchange’s consolidated value to a negative performance in the period .

Petrobras alone lost R$56.5 billion in market value, a movement that harmed not only large investors but around 850,000 individuals who own shares in the state-owned company.

“It was a mistake”, says corporate law specialist Maurício Moreira Menezes, partner at the Moreira Menezes Martins Advogados firm.

“Not only the rite provided for by law for the presentation of proposals by the company’s management and the approval of these proposals in a meeting, but also reputational damage a few years after Lava Jato.”

The way in which government ministers took it upon themselves to speak about the company’s strategic decisions was also questioned by Amec (Association of Investors in the Capital Market), which demanded action from the CVM (Securities Commission).

“We are at a very sensitive moment for the company, in which the news shows a serious noise in communication between the company and its private shareholders, and between the company and the controlling shareholder itself”, wrote, in a note, the president of the entity, Fábio Coelho.

“The controller, in fact, has the power to guide the company’s decisions”, says Menezes. “But this has to be done on a technical basis and following institutional rite. The President of the Republic cannot simply tell the company what to do.”

The way in which the topic was disclosed also disregarded internal warnings about the “potential significant drop in shares” and possible downgrades in the company’s assessment by investment banks.

In a presentation to the board, the technical area recommended a “detailed explanation” of the decision, with a focus on clarifying that retention would increase the possibility of dividends in more challenging scenarios and could be revised depending on the scenario throughout 2024.

In a statement, Petrobras stated that the decision on extraordinary dividends “followed the expected governance”. “The matter is the responsibility of the company’s board of directors, which assessed and decided, on Thursday (7), on the proposal.”

“The company also emphasizes that it acts with transparency and commitment to society and investors,” he said.

When contacted, the MME and the Civil House did not respond until the publication of this text.