Will Petrobras' New CEO Ensure a Better Future?


This could be the dawn of a new era for state-run exploration and production giant Petrobras (NYS: PBR) . Maria das Gracas Foster has taken over the company, replacing incumbent Jose Gabrielli, just as Petrobras announced disappointing fourth-quarter results.

Some CEO background
Foster isn't exactly a novice. She's a 31-year veteran in the company and has political experience to boot, having served as Brazil's secretary of oil, natural gas, and renewable fuels from 2003 to 2005. Her experience and government contacts should come in handy for future negotiations over gasoline prices. And in what seems to be a proactive approach to addressing existing problems and expanding operations, Foster has already laid out a blueprint for the future.

Challenges ahead
Increased operating expenses and greater gasoline imports -- thanks to a huge demand for auto fuel that the company couldn't meet because of a shortage of refineries -- led to declining earnings. Net profit dropped by 5% from the fourth quarter of 2010. However, the supply segment, which includes refining and marketing, registered a loss of nearly $6 billion in 2011.

Not surprisingly, many analysts have criticized Petrobras' plans to build five new refineries by 2015, since the E&P segment could witness stagnation in the process. But I believe this approach will help the company in the long run. Things may not look rosy in the short term for the refining industry but, I find nothing wrong with the strategy, considering the increasing Brazilian demand for fuel.

Why the move makes sense
Domestic demand for oil has taken off in the past decade because of burgeoning automobile sales, and this is a segment Petrobras has yet to fully take advantage of. The biggest problem has been gasoline pricing. The Brazilian government has resisted any price increases at the pump for the past eight years to keep inflation under control, and this situation is unlikely to change very soon.

Still, Brazil's huge oil reserves and the ability to refine it at home at a cheaper rate should not only reduce reliance on imports but also improve margins. Moreover, an emerging economy like Brazil's is fully capable of sustaining demand, which would eventually see Petrobras reaping huge returns in the long run, when the government de-subsidizes gas.

Petrobras seems to be in safe hands. Foster looks capable of carrying the company to the next level.

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