Boston, MA 11/04/2013 (wallstreetpr) – It seems that government sees some sense in what state controlled energy giant Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) had proposed as a new pricing formula. The Brazilian head of the state Dilma Rousseff has agreed in-principle to all the company to raise domestic prices of various petroleum products and fuels based on a pre-determined formula. These increases would not be ad-hoc in nature and cannot be done more than two to three times in a year. But it seems that government has not opened all its cards and has also said that the quantum of price increase should not be such that it triggers massive price inflation at consumer level.
The intent of this approval is clearly to provide nation’s biggest energy player with some incentives to stay on course with its future plans and to bring in predictability in its financial numbers in near future. But since Petrobras comes under government control, it has made a commitment that though the tentative energy price would have been arrived on basis of a formula, it would still not pass on the entire burden to consumers and is ready to foot a part of the losses it is currently bearing. As per sources, the formula gives weightage to international crude prices, volatility in exchange rates and several other factors. Once the new formula comes into effect, it is projected to help the company to reduce the short term gaps between local fuel prices and international crude prices. This price mismatch has recently led the company to accumulate loses to the tune of more than $10 billion.
But markets seem to be little skeptic about this whole thing and don’t fully subscribe to government’s effort to revitalize the company. Shares of company were down almost 2.5% at the time of announcement. But it is also clear that if this new pricing plan is properly executed, it will help the most indebted company of the western hemisphere to trim its debts to down to much lower levels.