Morgan Stanley Talks To The Petrobas CEO

Petroleo Brasileiro SA Petrobras (ADR) PBR hosted a meeting with analysts on June 10. Morgan Stanley’s Bruno Montanari maintained an Equal-weight rating for the company, while saying that the balanced and down-to-earth approach of new CEO Pedro Parente is welcome.

“Mr. Parente is well aware of the risks PBR faces, but also sees good opportunities ahead. The new team needs to deliver on the independency theme to regain credibility from investors. We look forward to the new business plan,” analyst Bruno Montanari wrote.

Message From New CEO

The analyst commented that investors would have liked what they heard from the new CEO, including:

1. There would be no political interference in running the company
2. The aim would be to introduce a professional management style, addressing only the objectives of the company
3. Petrobas would have proper internal controls and efficient capital allocation processes
4. The new management would reconsider the company’s size and prioritize value over volume

“And while acknowledging that PBR's scope to lead this turnaround is limited without further changes in legislation, Mr. Parente said that he obtained full support from the current government, which is willing to improve the sector's regulatory framework to ease the turnaround process at Petrobras,” Montanari mentioned.

Related Link: 4 Courses Of Action For Petrobras Management

New Business Plan

The new business plan would focus on divesting and forming new partnerships. Referring to the fuel pricing policy, the CEO stated that Petrobras would offer enough transparency to the market, to the extent that it does not interfere with the company's commercial strategy.

“We continue to struggle to understand how transparency could impair the commercial strategy given Petrobras's monopoly in fuel refining in Brazil,” Montanari commented.

Challenges Ahead

The analyst notes the significant risks highlighted by management in executing the new strategy:

1. The absence of any negotiations for a settlement of the class action in the US
2. The new CEO does not intend on addressing the company’s deficient capital structure through a new equity issuance
3. Management's current plan continues to rely mainly on debt financing solutions to solve its liquidity needs
4. Unions could significantly delay the turnaround process
5. The divestment process may be slow and complex, given the compliance, unions and regulatory issues