Petrobras skips write-downs in 3Q results

OREANDA-NEWS. The board of directors of Brazil's state-controlled Petrobras released delayed unaudited third quarter financial results early this morning, without making expected impairments for overpriced contracts tied to widespread alleged corruption.

In a late-night meeting, the directors failed to agree on the value of the write-downs.

"We found it impracticable to determine the exact quantification of these improperly recognized values, since the payments were made by external suppliers and cannot be traced in the company's accounting records," Petrobras chief executive Maria das Gracas Foster said in a statement issued around 4am local time.

Petrobras said it was analyzing allegations of a far-reaching kickback scheme that drove up costs for key downstream and midstream projects, but decided not to record write-downs.

The company is now considering alternative approaches, such as the "(i) use of average percentage of improper payments, mentioned at the testimonies; (ii) fair value measurement of the assets whose constitution was made through agreements with supplier companies in the context of" federal police investigations.

The decision extends a climate of uncertainty that has dogged the firm for months while investors await information on the extent of damage caused by the alleged corruption.

The widening scandal forced Petrobras to twice delay delivery of the unaudited third quarter results, which were originally scheduled for release in November.

The allegations that have prompted the arrest of three former Petrobras executives led the company?s independent auditor, PricewaterhouseCoopers (PwC), to decline signing off on the results. The decision has thwarted Petrobras' ability to tap international credit markets, which could delay the company's ambitious upstream and downstream expansion plans.

In December, Petrobras secured an extension for issuing the unaudited third quarter results. To avoid acceleration on bond covenants, the company had been required to release results by 31 January, with which it has now complied. The firm has not set a date for the release of audited financials, but says it will give the market 15 days notice.

The write-downs are considered a painful but necessary first step in a process of re-establishing credibility at Petrobras and in Brazil's oil industry, where large oil companies have a significant presence. An overhaul of the company's current senior management is also likely, despite Brasilia's assurance that Foster?s place is secure.

With huge sub-salt oil and natural gas reserves offshore, Brazil is emerging as a major source of non-Opec production, but the financial impact of the alleged corruption on Petrobras, coupled with the sharp decline in oil prices since mid-2014, has crimped the upstream outlook for the firm.

After two years of missed domestic crude production targets, Petrobras says domestic flow rates should grow by a more modest 4.5pc, plus or minus 1pc, over 2.03mn b/d in 2014. The company had targeted 2.07mn b/d in 2014, a 7.5pc increase over 1.03mn b/d in 2013, but only increased output by around 5pc, the result of delays in the installation of production platforms.

Petrobras plans to invest up to \$33bn this year, down from the estimated \$44bn a year under the company?s \$221bn 2014-18 business plan. A revised plan is pending.

Petrobras recorded a R3.08bn (\$1.19bn) net profit in the third quarter, down by 38pc from the second quarter and down by 9pc year-on-year. Profit for the first nine months of 2014 was R13.43bn, 22pc lower than the same period of 2013.

The company's upstream profit for the quarter reached R10.1bn, down around 13pc year-on-year, the result of lower oil prices and an extraordinary labor charge.

Downstream losses widened to R5.18bn in the third quarter, a 33pc increase compared with the second quarter but down by 6pc year-on-year. The increase was largely the result of a R2.7bn write-down related to the suspension of two massive refinery projects, Premium 1 and 2, which had previously been under review.

In October 2014, in the tense run-up to Brazil?s presidential run-off election on 26 October, Paulo Roberto Costa, Petrobras? former downstream director, told prosecutors of a major kickback scheme that allegedly diverted funds from inflated work contracts to Brazil's ruling Workers party (PT) and other coalition partners.

As part of a plea deal, Costa said he and other former Petrobras executives helped orchestrate a scheme that funneled money from Brazil's biggest construction firms to top-ranking politicians? campaign coffers.

In November, Brazilian federal police arrested around 20 top executives from the construction firms identified by Costa. Some have already cut plea deals of their own and corroborated Costa's claims.

PT politicians are expected to be the next target of federal police, possibly as early as next month.

The scandal has rattled the start of President Dilma Rousseff's second term this month, and threatens to do more political damage as investigations proceed.

Rousseff was the chairwoman of Petrobras' board between 2003 and 2010, when most of the illicit activities are alleged to have place, and mines and energy minister between 2003 and 2005. She denies any knowledge of the alleged scheme and has vowed to see any misappropriated funds returned to Petrobras.

"We should punish the people, not destroy the companies," Rousseff said yesterday.

Petrobras, which maintains it is the victim of the scheme, has established a new governance division but remains at the center of federal probes by local securities regulator CVM and US securities regulator SEC and the US justice department.

The company will likely face stiff penalties for non-compliance with Brazilian and US rules governing publicly traded companies, but those investigations are not likely to be resolved for years.