Can Petrobras avert a looming shutdown?

Petrobras (PBR, quote) surged 5.8% last Friday when the company reported that diesel prices at refineries would be raised by 6%. The news boosted shares of the company which, because of strict price controls, has been losing money on domestic sales of fuel.

Image courtesy Wikimedia: http://commons.wikimedia.org/wiki/File:Posto_de_Traipu.jpg

Petrobras gas station in Brazil

Since the announcement, the shares have given back 1.0% and are still down 23.5% since the beginning of year versus a 4% loss in the Energy Select Sector SPDR (XLE, quote). The slowdown in China and Europe is pressuring the energy sector across the board but Petrobras has had to deal with structural problems and government interference to boot.

Now, the company may have a work stoppage on its hands as well. Management has been in talks with the Federal Oil Workers Union to avert a planned strike scheduled for July 20. The workers contend that Petrobras has not come up with a new plan for profit sharing. Management and investors would contend that there has not been that much in profit to share.

The company is due to release second quarter earnings on August 20th and expected to post a 48% drop to $0.55 per share. Earnings per share fell 23% over the last fiscal year against an increase of 21% in net revenues. While costs have increased throughout the industry, operating expenses at Petrobras surged by 26%.

Management has been able to come to an 11th hour agreement with workers in the past and large scale stoppages are rare. With a little under two weeks until the planned walkout, the probability is good that an agreement is reached in time. Neither the government, nor the company wants a massive strike adding resistance to an already struggling economy.

Investors may be in a no-win situation though with either outcome. A strike would throw a wrench in already shaky production goals and would probably only be ended by concessions that could have been reached in the first place. An agreement expanding profit-sharing benefits is the most likely outcome and the lesser of two evils.

Petrobras investors have had to deal with the government using the company as its own personal piggy bank, now the workers are looking to take a cut as well.