The windfall tax announced on Feb. 28 by the Brazilian government, which levies a 9.2% export tax on crude oil and expected to be effective for at least the next for four months, raises concerns regarding President Lula’s administration’s policies for the energy sector. The announcement signals the beginning of increased government interference across the industry, which Fitch Ratings views as negative.

The tax is intended to strengthen fiscal balance by bridging the gap between the new, lower tax rate on fuels, and the previous one that was eliminated by the Bolsonaro administration. Fitch expects the new tax to affect investments in the energy sector in the medium term if it becomes permanent upon Congressional approval.

For Petroleo Brasiliero S.A. (Petrobras; BB-/Stable) the impact could be material should policies enacted materially affect financial flexibility though unfavorable actions on pricing policy. Petrobras has impressively turned itself around in the last few years. The company repaid nearly USD100 billion of gross debt from its peak in 2014, 25% of which came from sales of non-core assets, and the rest from internal cash generation. This improvement benefitted the federal government greatly.

In 2022, the company reported tax and royalty payments to the government of approximately USD53.1 billion, excluding the government’s 36.8% economic stake in the USD$37.7 billion in dividend payment to all shareholders. In total, the Brazilian government received USD$67.0 billion, or 3.3% of GDP in 2022 from Petrobras. Tax pressures and policies that weaken the company’s financial flexibility are likely to risk its future investments.

Fitch estimates the impact for Petro Rio S.A. (PRIO; Issuer Default Ratings [IDRs] BB-/Stable and National Long-Term Rating A(bra)/Stable), which exports most of its oil production (around 46 kbbl/d), can reach a 12% decline in EBITDA, but EBITDA leverage would increase only by a modest 0.1x, on average over 2023-2025. Net leverage should continue to be negative in that time period, as the company carries strong cash balance. Should it become permanent, the new tax could encourage PRIO and other independent oil exporters to sell locally, as local sales are subject to a similar tax rate (9.25%) and low-cost production profiles give flexibility.

Companies that sell in the local market, such as 3R Petroleum Oleo e Gas S.A. (3R; A(bra)/Stable) and Trident Energy L.P. (Trident; IDRs B+/Stable), could face some pressure on prices in the medium term as increases in local inventory can drive local prices down, but these companies are low-cost producers and should remain profitable even at lower local prices.
Source: Fitch Ratings