Brazil’s Diesel Subsidy Could Supercharge Petrobras (PETR3; PETR4) Returns to 12.7%

A new diesel subsidy package announced by the Brazilian federal government is poised to significantly enhance shareholder returns for state-controlled oil company Petrobras (PETR4.SA), according to an analysis by BTG Pactual (BPAC11.SA).

The measures could elevate Petrobras's free cash flow yield to shareholders to approximately 12.7% by 2026, analysts Bruno Montanari de Almeida and Pedro Soares da Cunha stated in a report. Under the new scheme, Petrobras is expected to receive around 4.77 reais per liter of diesel sold, equivalent to $147 per barrel.

While the Import Parity Index (IPP) currently stands at 6.18 reais per liter, subsidies for imported diesel, estimated at 1.52 reais per liter, effectively reduce the IPP to about 4.66 reais per liter. "This implies that Petrobras is receiving the maximum possible in this scenario," the BTG team noted.

The package includes an additional subsidy of 0.80 reais per liter for diesel produced domestically, initially valid for two months. BTG Pactual estimates this could inject an additional $1.5 billion per quarter into Petrobras's revenues. "The additional subsidy of R$0.80 per liter, even if valid for only two months, implies approximately $1.5 billion per quarter in incremental revenue," the analysts highlighted. They added that extending this benefit until year-end could impact the FCFE yield by about 3.5 percentage points.

This 12.7% yield projection is based on Brent crude oil prices at $80 per barrel and stable fuel prices throughout 2026.

BTG Pactual also anticipates positive impacts for the distribution sector. An increased subsidy of 1.20 reais per liter for imported diesel is expected to boost distributors' participation in the government program. "The increase in the subsidy to R$1.20 per liter should encourage greater adherence to the program by distributors. This tends to reduce distortions and increase predictability in the fuel market," the bank assessed.

Despite an environment of heightened government intervention, BTG's report concludes that Petrobras is likely to maintain its profitability and continue high levels of cash distribution. "The package creates an environment in which the company maintains value capture while the domestic market adjusts through subsidies," the team concluded.

In related developments, Petrobras recently approved the financing for the Sergipe Deepwater project, which aims to produce 200,000 barrels of oil and 18 million cubic meters of gas daily. This initiative underscores the company's commitment to natural gas as a transitional fuel and its broader energy transition strategy.

Petrobras is also advancing projects in renewable fuels, including co-processed diesel and aviation Sustainable Aviation Fuel (SAF), which incorporate vegetable oil or recycled cooking oil. The company is also investing in solar energy, with a project already operational at its Minas Gerais refinery, aiming for self-sufficiency and potential electricity export.

President Lula is seeking to annul a recent Petrobras auction for LPG (cooking gas) supply, citing concerns over significant market distortions. Petrobras currently sells 13kg of gas to distributors at a fixed price of R$34.70, unchanged since July 2024. 

However, as Petrobras cannot meet 100% of Brazil's LPG demand, it sells by quotas and occasionally holds extra-quota auctions. A recent auction saw prices reach R$72, more than double the fixed price in some regions, with premiums ranging from 48% to 82% above the fixed value. 

This auction accounted for about 15% of Brazil's monthly gas demand, and the price increase is expected to reach consumers. Petrobras justifies these auctions by citing industrial supply and demand management, leveraging external market prices to increase profit margins without unpopular fixed-price adjustments, and for logistical control. 

The situation highlights a conflict between Petrobras's right to operate as a mixed-capital company (51% government, 49% private) and the government's desire to control consumer prices, especially in an election year. 

Critics, including President Lula, view high profits from such auctions as exploitative, and can generate inflation and directly affect the lives of Brazilians. 

To combat the high prices of fuel and cooking gas, the Brazilian government has implemented measures to curb rising fuel prices, including subsidies for national and imported diesel, tax exemptions for biodiesel, and credit lines for airlines. 

These measures are initially valid for two months, with a potential impact of R$31 billion if extended until year-end. The government claims a "zero effect" on public coffers due to increased revenue from other sources, such as a 12% increase in oil export tax, estimated to generate R$32 billion. 

For imported diesel, a R$1.20 per liter subsidy is in place, with states contributing R$0.60. Domestically produced diesel receives an R$0.80 per liter subsidy fully funded by the federal government. These are in addition to a R$0.32 per liter subsidy announced earlier. Importers are expected to pass these benefits to consumers. Biodiesel will see federal tax exemptions (PIS/Cofins), saving R$0.02 per liter. 

LPG (cooking gas) imports will receive a federal subsidy of R$850 per ton. The airline sector, heavily impacted by rising aviation kerosene prices, will benefit from up to R$9 billion in credit lines per company, federal tax exemptions (PIS/Cofins) on aviation kerosene (saving R$0.07 per liter), and deferred payments of fees to the Brazilian Air Force until December. 

The government's economic team believes these measures, combined with increased revenue, will offset the costs, though the actual impact on revenue and expenditure remains to be seen.

Cost of living in Brazil: domestic gas prices, gasoline, and ethanol rise and affect the income of Brazilian citizens

According to the newspaper Folha de S.Paulo, Petrobras readjusted today "the price of cooking gas by about 5%". According to the newspaper, the price increase is valid for all types of LPG (liquefied petroleum gas), which includes domestic (for cooking) and industrial gas.

This is the fifth increase in domestic gas in 2019. The last was on November 25, when Petrobras (PETR3; PETR4) readjusted the domestic gas cylinder price by 4%.

According to a survey by the National Agency of Petroleum, Natural Gas and Biofuels (ANP), in the early days of December, in Belo Horizonte, Minas Gerais, the price of cooking gas rose twice the inflation measured by the IPCA.

Already the price of ethanol in the pumps of gas stations in Brazil is the highest in the last six years. To make matters worse, the price of gasoline has also skyrocketed. Thus, fuel readjustments make life harder for Brazilians this holiday season.

One-fifth of Brazilian families use coal to cook food because of pricing policy for household gas of Petrobras

According to a survey published by the IBGE (Pnad Contínua), the impoverishment of the population produced by the prolonged economic crisis combined with rising unemployment and the price of LPG (Liquefied petroleum gas) cylinder led one-fifth of Brazilian families to use firewood or charcoal for cooking. Today, 14 million households prepare food in this way, an increase of 27 percent or three million homes between 2016 and 2018. In the Southeast fo Brazil, growth was 60 percent.

Meanwhile, Petrobras maintains a more expensive price for cooking gas than the one practiced internally since 2018 to recover losses that the company has had in recent years. It is a monopoly that harms the Brazilian people for the benefit of foreign and Brazilian investors.

Unfortunately, this pricing policy of Petrobras is driving the poorest classes in Brazil to return to using firewood to make food. A return to the Middle Ages. It is a country where the "modernity" of the "market prices" practiced by Petrobras forces the use of firewood and coal.

In Brazil, the readjustments in the price of LPG (liquefied petroleum gas) practiced by Petrobras are quarterly and consider international price averages and the exchange rate in previous quarters. It is this policy that led thousands of Brazilians to cook between soot and smoke.