Petrobras Head Resigns as Bolsonaro Rages About Fuel Prices

(Bloomberg) — Petrobras’s chief executive officer Jose Mauro Coelho resigned following a fuel price increase that has angered President Jair Bolsonaro and prompted calls for a congressional inquiry into the state-owned oil producer.

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Petroleo Brasileiro SA, as the company is formally known, announced its CEO departure in a statement on Monday. Bolsonaro had already fired him in May and named a replacement, but he remained in the role while firm went through the formal procedures for appointing its next chief executive.

The Rio de Janeiro-based company, which recently lost the title of Latin America’s most valuable publicly-traded firm to miner Vale SA, lost about 22 billion reais ($4.3 billion) in market value since Friday, when it raised domestic fuel prices, irking Bolsonaro and his allies. Preferred shares dropped as much as 5.1% to 25.91 reais in early trading in Sao Paulo on Monday and then reversed the losses.

Increased political risks have offset Petrobras’s cheap valuation and robust dividends. The stock is currently trading at below 2 times enterprise value to forward Ebitda, less than half the 4.6 and 4.4 multiples for U.S. oil giants Chevron Corp. and Exxon Mobil Corp., respectively, according to data compiled by Bloomberg.

“We don’t expect noise to fade until October,” Banco BTG Pactual SA analysts led by Pedro Soares wrote in a note. “Any future pressure to raise fuel prices will find major government pushback between now and election day.”

Read More: Brazil’s Bolsonaro Says Congress Will Investigate Petrobras

Brazil’s president, who is seeking re-election in October, has been publicly bashing Petrobras for what he calls “abusive profits” and has sacked three of its chief executive officers over frustration with the company’s wholesale fuel prices that track international levels. Pump prices and inflation in general are a major complaint among voters.

Subsidies and Privatization

In a bid to ease the pain for consumers, the government is pushing to increase the amount of fuel subsidies being debated in congress to as much as 50 billion reais in a move that would bypass spending restrictions, said three people with knowledge of the matter.

One possibility is to fund the aid with taxes on the oil industry, the people said, adding that officials are studying how to implement the measures without violating electoral laws that ban some types of subsidies ahead of the vote.

The government is also pursuing plans to dilute the government’s majority of voting shares in the company by converting them into common shares, the people said, asking for anonymity because the discussion isn’t public. Bolsonaro has previously suggested privatizing Petrobras so the government doesn’t get blamed for fluctuations in fuel prices. Any measure regarding privatization, however, is unlikely to happen before the election.

Petrobras’s head of exploration and production, Fernando Borges, will take over as interim CEO until Caio Paes de Andrade is approved by shareholders.

Petrobras is set to remain in the political spotlight through this year’s elections. Bolsonaro said on Saturday he has the support of congress to start a probe into company and its pricing policy. Lower house Speaker Arthur Lira has also threatened to intervene by imposing punitive taxes on the company’s record profits.

“All evidence points to an interventionist strategy,” said Marcelo de Assis, the head of Latin American upstream research at consultant Wood Mackenzie Ltd. “This can open the door to artificial prices, and in the worst case scenario diesel shortages.”

(Updates market reaction in third paragraph and background throughout)