Thursday, January 29, 2015

George Soros Update: Petrobras Releases Delayed Q3 Results, Leaves Out Corruption Writedowns

1/29/2015

SAO PAULO – Brazilian state-controlled oil company Petrobras released its delayed 2014 third-quarter earnings report on Wednesday, but the results do not indicate how badly a massive corruption scandal distorted its asset valuations.

The company’s share price plunged after the unaudited results were released without the writedowns after a two-month delay (auditor PriceWaterhouseCoopers has declined to certify the results due to the graft allegations), falling by more than 10 percent shortly after the market opening.

Petrobras calculated its net income at 3.09 billion reais (some $1.19 billion) for the July-September 2014 period, down 38 percent from the previous quarter, and at 13.44 billion reais (around $5.19 billion) for the year’s first nine months, a decline of 22 percent from the same period of 2013.

But the quarterly result does not give a monetary estimate for how much the company’s assets were overvalued as a result of the kickback scheme, in which leading Brazilian engineering companies allegedly formed a cartel to artificially drive up the price of contracts awarded by Petrobras.

As part of that scheme, the companies paid kickbacks to some Petrobras executives and funneled a portion of the money from the inflated contracts to Brazilian political parties.

Those fat contracts have resulted in the overvaluation of assets such as refineries and ships.

Petrobras CEO Maria das Graças Silva Foster, however, said in a letter to investors that it was “impractical to quantify these values with precision, given that the payments were made by outside suppliers and cannot be traced to the company’s accounting books.”

Prosecutors have formally charged dozens of people for their alleged role in the corruption scandal, including executives from Petrobras and leading Brazilian construction and engineering companies OAS, Camargo Correa, UTC, Mendes Jr., Engevix and Galvao Engenharia.

Brazil’s Federal Police also announced on Tuesday that it is investigating 10 more construction companies, including Andrade Gutierrez, the country’s third-largest, and the Brazilian unit of Argentine conglomerate Techint.

The amount of money diverted from the state-controlled oil company over the past 10 years could total 10 billion reais (nearly $3.86 billion), according to the federal Attorney General’s Office’s estimates, although the investigation is ongoing.

The names of many of those involved in the scheme were revealed by a jailed former Petrobras director, Paulo Roberto Costa, who reached a plea deal with prosecutors.

Apart from the corruption scandal, Petrobras has been adversely affected by the recent plunge in international oil prices and its obligation in recent years to subsidize the price of domestic fuel, which is kept artificially low to keep inflation in check.

This accumulation of factors has had a negative impact on Petrobras’ share price on the Sao Paulo Stock Exchange, where the company’s preferred shares fell 37 percent in 2014. 


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