Dividend discord puts Petrobras CEO under political pressure

The CEO of Brazil's state-run oil giant Petrobras, Jean Paul Prates, is experiencing yet another political imbroglio amidst a conflict with some sectors of the federal government. 

At the heart of the matter is a disagreement over the distribution of dividends to Petrobras shareholders, as directed by the company board members representing the government, according to local media reports. 

After reporting a 34% drop in net profits in 2023 and suspending the payment of extraordinary dividends, Petrobras saw its market value plummet 55.3bn reais (US$11.1bn) on March 8, piling the pressure on Prates. 

The dividend issue goes back to the times when the company was headed by Roberto Castelo Branco between 2019 and 2021. During his tenure, the company allocated approximately 60% of its free cash flow to dividends. 

Free cash flow represents the residual amount after investments, but the new company dividend policy broadens the definition of investments to include share buybacks.

In 2022, buoyed by soaring fossil fuel prices due to the war in Ukraine, asset divestments and reduced investments, Petrobras paid out more dividends than all the other companies listed on the Brazilian stock exchange (B3) combined, according to a survey by TradeMap. 

Given that the federal government owns 28.7% of the oil company's shares, the profits generated a 55.8bn-real windfall for public coffers.

In July 2023, after Luiz Inácio Lula da Silva became president on January 1, the board reduced the dividends paid to shareholders to 45% of free cash flow.

The new dividend distribution percentage sought to balance the interests of the government and minority shareholders. 

The president’s Workers Party, which wants Petrobras to drive national development, expects it to increase investments, including in the energy transition, but minority shareholders naturally want higher dividends. 

The new conflict emerged after the company's board, led by directors appointed by the government, decided to completely withhold the payment of extraordinary dividends to shareholders, that is, those paid in excess of the stipulated minimum. Consequently, only ordinary, mandatory payments were disbursed, amounting to 14bn reais. 

Prates disagreed with the government's directive and wanted to pay out 50% of the extraordinary dividends, leading him to abstain in the board’s vote, which was not well received by certain sectors of the government, including the mines and energy ministry. 

Prates and mines and energy minister Alexandre Silveira have publicly clashed over issues such as fuel pricing policy and the reinjection of natural gas.

On the other hand, economy minister Fernando Haddad's team supported the payment of the extraordinary dividends, viewing it as contributing to the government’s goal of eliminating the fiscal deficit by 2025, bearing in mind that the government is Petrobras' biggest shareholder. 

Amid mounting speculation about the possibility of Prates resigning, Silveira dismissed the rumors following a meeting between Lula, ministers and the CEO on Tuesday, reaffirming the board’s decision to hold back the extraordinary dividends. 

Lula between Silveira (left) and Prates (right)/Ricardo Stuckert (PR)

In a press release on Friday, Petrobras refuted media reports that Prates and the company's financial and investor relations director, Sérgio Caetano Leite, had struck an "agreement with investors" to pay extraordinary dividends. 

The company also said it was untrue that Prates had offered to resign due to this issue or any other. 

Petrobras stressed it reported its second highest net profit in history last year and reduced its financial debt by US$1.2bn, with a new commercial strategy that made the company more competitive in the market. It also underlined its commitment to continuity and financial sustainability.