On Feb. 6, Brazilian President Dilma Rousseff appointed Aldemir Bendine, chief executive of state-run bank Banco do Brasil, as Petrobras’ (NYSE:PBR) new CEO. The choice of a new head for the oil company was announced days after the resignation of former CEO Maria das Graças Foster, and five other executives, on Feb. 4. Ms. Foster’s decision to step down was met with elation by investors. The company’s shares rose over 7% as rumors about Foster’s resignation leaked out to the press a day before the official announcement.
The buoyant reaction was, however, based on elusive hopes that a market-friendly name would come into play as a replacement. The choice for Mr. Bendine thus frustrated investor’s expectations, causing the company’s shares to drop over 9% as the market closed the day of the communiqué’s release.
A Contentious Choice
Disappointment with Mr. Bendine’s selection is not unjustified. Apart from a complete lack of experience in the oil and gas industry, the banker has longmaintained close ties with the Worker’s Party (PT), accused of receiving proceeds from Petrobras’ corruption scam. In 2009, Mr. Bendine’s appointment as head of Banco do Brasil by former president Lula da Silva was largely perceived as a government intervention to secure a loose monetary policy by reducing interest rates and expanding credit.
The banker’s political alignment with the PT might prove especially costly for Petrobras given that much of the mismanagement in the past has been caused by government intervention in the company. Price controls and local content requirements have reduced Petrobras’ profit margins, contributing to its mounting debt. In the same vein, the government continues to rely on its largest enterprise for job creation. In this context, Mr. Bendine’s proximity to the ruling party severely aggravates existing concerns.
In short, there are reasons to believe that Mr. Bendine is not experienced enough to run a US$48 billion oil giant, nor independent enough to lead the company through a colossal corruption scandal. By choosing a state banker, Ms. Rousseff appears to have tried to cater to both the market and her party — a seemingly unattainable goal.
A Bumpy Start to 2015
The president’s need to appease her party might well have been a response to its current institutional crisis. The PT is accused of receiving up to US$200 million in bribes between 2003 and 2013, according to Petrobras’ former executive manager, Pedro Barusco. Several names in the party’s leadership are under investigation, including its treasurer, João Vaccari. Ms. Rousseff has not been directly linked to the scandal, even though she was member of the company’s board of directors before running for the presidency.
The trigger of Ms. Foster’s resignation was her failure to broker a consensus regarding the financial impact of the corruption scheme on the company. On Jan. 28, after a two-month delay, Petrobras released its unaudited third-quarter financial statements. The results, however, did not include thewritedowns related to the scam. The lack of transparency upset investors, immediately causing share prices to plunge.
The writedowns are now expected to be included in the fourth-quarter results, to be released in April. Last week, the company unveiled estimates that assets had been inflated by about US$32 billion. Deloitte and BNP Paribas produced the analysis, according to Brazilian newspapers, but the numbers were discarded, as it was not possible to single out the losses related to corruption. Ms. Rousseff considers the amount an exaggeration, and was hence not pleased by their disclosure.
Following the release of Petrobras’ third-quarter earnings, both Moody’s and Fitch downgraded the company to the lowest level of investment grade. Both credit rating agencies cited as main reason the risk resulting from the company’s inability to quantify the costs of the corruption scandal, and the liquidity pressures that follow as investors are left in the dark.
Although nearly a year has passed since the start of investigation into Petrobras, the company’s future has never been gloomier. Apart from the need for competent and independent leadership, reforms must be implemented at a deeper level. For instance, strengthening internal controls such as the recently created Compliance, Governance and Risk Directory is crucial to restore the company’s image.
Most fundamentally, allowing Petrobras to respond to market forces as opposed to a political agenda must be the rule if profit margins are to be preserved. A change in leadership cannot possibly bring solutions to all of the company’s problems. By making a political appointment for the company’s chief executive, however, the Brazilian government has missed a timely opportunity to signal commitment to the one thing Petrobras needs the most: true change.