By Will Connors And Paul Kiernan
RIO DE JANEIRO--Brazilian state-run oil company Petroleo
Brasileiro SA reported its delayed third-quarter results Wednesday,
but didn't include an estimate for how much a vast corruption
scandal has cost, a move that sent Petrobras shares tumbling and
raised questions about the management of one of Latin America's
biggest companies.
The third-quarter results, released Wednesday, were originally
expected in November but were delayed after an alleged kickback
scheme involving Petrobras contracts led the company's auditing
firm, PricewaterhouseCoopers, to decline to sign off on the
results.
Petrobras said Wednesday it posted a third-quarter 2014 net
profit of 3.09 billion reais ($1.18 billion), down from 3.39
billion reais in the same period of 2013. The company's revenue
totaled 88.37 billion reais in the quarter, up from 77.7 billion
reais. Earnings before interest, taxes, depreciation and
amortization, or Ebitda, decreased nearly 10% year-on-year to 11.7
billion reais.
The third-quarter results remain unaudited. Petrobras said "we
continue to work closely" with PricewaterhouseCoopers to release
audited results "as quickly as possible."
A PricewaterhouseCoopers spokeswoman didn't immediately respond
to a request for comment.
Beyond those results, investors were looking for Petrobras to
assign a dollar amount to the corruption scandal. Petrobras said it
was "impracticable" to announce a specific corruption-related
write-down because of various accounting difficulties.
"The main issue for Petrobras was to gain credibility,"
Frederico Mesnik, the managing partner at Sao Paulo-based Humaitá
Investimentos, which has 180 million reais under management. "When
it didn't [announce a write-down], the credibility went down the
drain and nothing else matters. We need to see, as investors, a
credible statement with the numbers."
Shares fell more than 11% in morning trading in Sao Paulo and
more than 12% in New York. Shares have fallen 44% in the last three
months.
The corruption scheme involves three former Petrobras
executives, some of Brazil's largest construction-companies, and a
group of money launderers that allegedly colluded to inflate the
cost of Petrobras contracts, and then pocketed the difference. The
three former Petrobras executives have been charged with money
laundering and corruption. More than 30 people have been indicted
so far, and more arrests are expected in the case, which is known
as Operation Car Wash.
Petrobras had indicated that it would include a write-down based
on the cost of those inflated contracts in its earnings report, and
the company says that it has been working since November to tally
the financial damage from the alleged corruption scheme, but that
doing so now is "impracticable."
"The testimonies examined by Petrobras have indicated the
commission of unlawful acts, such as cartelization of suppliers and
former employees taking bribes, indicating that the payments to
such suppliers were improperly recognized as part of the cost of
our fixed assets, therefore requiring adjustments," Chief Executive
Maria das Graças Foster said in a statement on Wednesday.
Ms. Foster said disclosing a specific amount wasn't possible
"since the [illegal] payments were made by external suppliers and
cannot be traced back to the company's accounting records."
Petrobras said it considered two possible approaches to
quantifying the alleged corruption. The first would include alleged
improper payments specifically mentioned in the probe as well as 3%
of the value of contracts signed with the companies under
investigation. That methodology resulted in "an estimated loss of
BRL4.06 billion."
The other approach Petrobras considered was to have certain
assets appraised by independent auditors to determine the
difference between their fair value and their book value.
Ms. Foster said Petrobras and its independent auditors appraised
188.4 billion reais in fixed assets--about one-third of the
company's property, plant and equipment--that were contracted with
companies mentioned in Operation Car Wash between 2004 and April
2014, when the corruption allegedly took place. The assets' fair
value was determined to be 61.4 billion reais less than their book
value.
"Everyone acknowledges that quantifying the impacts of
corruption on the value of assets is difficult. The problem is the
lack of transparency," said Rogerio Freitas, a fund manager at Rio
de Janeiro's Teórica Investimentos, which has around $100 million
under management. "The range is so big that it shows how little
transparency the process has."
Petrobras' balance sheet wasn't entirely without impairment
charges, however. The company wrote off a total of 2.71 billion
reais related to the construction of two refineries, Premium I and
Premium II, in northeastern Brazil, after deciding not to move
forward with them.
The company also provided more details on a slowdown in its
ambitious spending program, saying that it would reduce the pace of
investments in certain projects, though it declined to say which
projects, and its new budget for this year would be between $31
billion and $33 billion. Previously, the company was averaging
around $44 billion a year as part of a plan to spend more than $220
billion by 2018, primarily on ramping up offshore oil
production.
The delay in reporting its earnings had effectively shut off
Petrobras' access to capital markets, a major concern for investors
since Petrobras is among the most indebted oil companies in the
world, with some $170 billion in debt, according to Moody's
Investors Service.
On Wednesday, Petrobras said it would not need to access debt
markets in 2015 "due to steps that will increase cash flow."
That contrasts with a report by Fitch Ratings earlier this week
that said Petrobras would likely require "at least" $15 billion to
$25 billion of financing in 2015. The amount included $11 billion
in debt maturing this year as well as the expected gap between the
company's cash flow and its capital expenditures.
Fitch said it expected the Brazilian government to step in with
loan guarantees or direct financing from state development bank
BNDES to cover the shortfall.
Financial ratings agencies have threatened to downgrade
Petrobras' credit if it continued to delay reporting its
earnings.
In addition to Brazilian authorities, the U.S. Securities and
Exchange Commission and the U.S. Justice Department are conducting
their own investigations into alleged wrongdoing at Petrobras.
Petrobras is also the target of more than a dozen class-action
lawsuits in New York, where Petrobras shares are traded. The suits
allege that Petrobras willfully misled investors about the alleged
corruption.
Petrobras says that it is cooperating with these investigations,
and has set up an internal compliance division to deal with
possible issues of impropriety going forward.
Rogerio Jelmayer contributed to this article.
Write to Will Connors at william.connors@wsj.com and Paul
Kiernan at paul.kiernan@wsj.com
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