Must-know: The structure of Petrobras’ refining business

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Petrobras’ refining business

Petrobras (PBR) has been losing money in its Refining, Transportation, and Marketing segment. It recorded a net loss before tax of $8.7 billion, $17.7 billion, and $12.4 billion in 2011, 2012, and 2013, respectively.

Refining and Marketing EBT

What ails Refining segment

PBR has been investing in the Refining segment to upgrade its facilities. It wants to improve its gasoline and diesel quality to comply with stricter environmental regulations. In 2013, it invested $2.5 billion, or 79%, of the segment’s total investment in “hydrotreating” units.

It also invested another $174 million in its coking units to convert heavy oil into lighter products.

These improvements are part of its on-going effort to reduce the sulfur content in diesel. This effort started in 2005. PBR intends to take advantage of the price differential between heavy and light crude.

Most of the investments went into quality improvement. As a result, the company couldn’t spend much on growth.

Refining margin drivers and currency benchmark

PBR is a vertically integrated company. It sources input for crude products from its Exploration and Production segment. The company sells is products in the domestic market at domestic prices. It also sells its products in the international markets.

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If the sale price falls—because of lack of demand or changes in the underlying domestic currency against the U.S. dollar—the company’s margins suffer. PBR is able to increase the sales price to maintain its margin. It has the dominant market share in Brazil. However, its ability to increase the sales price is limited—without disrupting the demand quality.

Cost-cutting initiatives paid off

In 2013, PBR was able to cut down on its loss in the segment. PBR had an on-going price adjustment process. In November 2011, PBR increased wholesale gasoline prices by 10%. It increased diesel prices by 2%. This was followed by a second round of increases in 2012. It increased gasoline’s price by 7.8% and diesel’s price by 10.2%. In 2013, it increased gasoline and diesel sales prices by 10.9% and 19.6%, respectively.

Higher sales price leads to higher revenues and lower net loss. The loss margin also came down to ~11% in 2013—from ~16% in 2013.

However, things haven’t changed in 2014. In the first half of 2014, loss before taxes from this segment was ~$5.7 billion—compared to ~$5.1 billion in the first half of 2013.

Other major U.S. refiners include Valero Energy (VLO), Tesoro (TSO), HollyFrontier (or HFC), and Marathon Petroleum (MPC). These companies are components of the Energy Sector Select SPDR ETF (XLE). Check out our articles on PSX here.

In the next part of the series, we’ll discuss how PBR distributes its refined products.

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