by Ben Miller

When news of Maria Das Graças Foster’s appointment as the new CEO of Petrobas emerged on January 23, the Brazilian oil company’s stock closed that day 3.5% higher. The positive market response confirmed investors’ high comfort levels with the decision. It also addressed the question of whether José Sérgio Gabrielli’s replacement as CEO would be an oil specialist or political appointee. The answer seems to be both.

Foster certainly has the work experience and strong track record to support the decision to put her at the head of what is one of the world’s top five oil companies, making her the first woman ever to hold such a position. “Graça,” as Foster is known, comes from Petrobras’s natural gas and energy division, but has sat in a variety of posts since she started at the company as an intern in 1978.

A trained chemical engineer who grew up in a Rio de Janeiro favela, Foster was responsible for more than doubling profits for Petrobras’s gas and power business in the first nine months of the year as she sought to expand sales among industrial clients and fertilizer producers that use gas.

At the same time, she has also been close to President Dilma Rousseff for two decades. Sometimes called a clone of President Rousseff, the two first met when the president was energy secretary for the state of Rio Grande do Sul. In 2003, Foster went to work for her as head of Brazil’s oil and natural gas division while Rousseff was Brazil’s energy minister.

Gabrielli denies his leaving was forced, saying publicly that his exit was planned 18 months beforehand, and that he does not see it as a government attempt to exhibit tighter control over the company.

“Foster has the political connection, but on the other hand she has an extremely strong technical background – I think this is above everything else,” says Igor Maresti, an oil equities analyst at Banco Espírito Santo Investimentos.

The government certainly casts its shadow over the publicly traded company, not least by hand picking board members. Cries of political interference have been heard for years, but state support has its advantages, namely giving Petrobras access to a superior resource portfolio.

Arguably, Foster’s appointment brings more technical expertise than Gabrielli, who was also seen as a political appointment and had little oil and gas experience when he joined the company to become CFO in 2003 and was then promoted to CEO in 2005. Gabrielli is expected to take a position in the government of his home state of Bahia.

“I don’t believe the market sees a real change in Petrobras,” says Ricardo Corrêa, an equity analyst at Ativa Corretora. “You are changing a very political president for an insider who knows technical issues. That is good but I don’t believe there is less of a political agenda in the investment process.”

Corrêa explains that Foster is very well connected and very committed to Dilma’s agenda. Regardless of who sits in the CEO chair, investors have long shown a concern about the state imposing its own agenda over the company. Such issues have come to the fore ever since Petrobras’s jumbo $70 billion equity raise in 2010, a deal that included a $42.5 billion equivalent in stock to the government in exchange for rights to 5 billion barrels worth of oil reserves.

“The questions about Petrobras have more to do with the government than with the CEO,” says Arnaldo Silva, equity portfolio manager at Beta Advisors in Rio. “The challenges will be the same in the short term.”

Challenges Ahead

Indeed, the company faces several hurdles in coming years. Gabrielli vacates the top job at a time when his replacement will have to push the company to meet its ambitious cumulative average production growth goal of 10% a year to reach four million barrels a day in 2015.

Investor concerns are many, not least because regulations designed to ensure Brazilians benefit from the work surrounding the pre-salt development are threatening to cause bottlenecks. These include requirements for domestic subcontractors as well as the obligation to give Petrobras a 30% stake in any consortium operating in the pre-sale operations.

Analysts have resigned themselves to such policies, and note that any rule changes on this front would likely need to be pushed through by the government itself rather than Foster who is already well aware of what it takes to run the company efficiently.

“The global industry needs to increase capacity to accommodate all this demand and on top of that, most of this equipment needs to be built in Brazil to fulfill the local content requirement,” Maresti says.

The shop also cites a risk of deterioration in the performance of the refining and marketing segment, and unattractive production sharing contract terms for future pre-salt development.

Rising costs are also creating some unease. Given Petrobras’s focus on offshore production, it has high capex needs and leverage is steadily increasing. It will spend $225 billion this decade in order to achieve a fourfold jump in deepwater production and to boost onshore distribution and downstream capacity.

The program includes some monumental offshore projects such as a floating tanker terminal and gas liquefaction plant, part of a plan to more than double Brazil’s oil and gas output to six million barrels per day in oil-equivalent terms.

The company’s finding and development costs rose 60% in 2010 to $14.38 per barrel of oil-equivalent for 2010 and should close higher in the final 2011 tally, according to ratings agency estimates. The company’s ambitious goals show in its capex of roughly $40 billion for 2011, the highest among regional peers.

The high capex resulted in $9 billion of negative free cash flow during the first nine months of 2011 with $77.9 billion in debt. Petrobras’ total debt to proven reserves stood at $9.8 per barrel of oil equivalent, as of September 30.

Asset Sales & Bonds

Up to $149 billion of the required $225 billion will be derived from future profit flow. A further $13.6 billion is expected to come from the sale of production and exploratory assets in Asia, minority ownership stakes in “non-core” assets, and the rights to some receivables.

The company’s plans also depend on debt financing, to the tune of up to $18 billion per year over the next several years. This is ambitious but few doubt the oil company’s ability to raise these amounts.

Petrobras bettered a $6 billion bond offering in January 2011, pricing a record setting $7 billion sale in February that involved new three and five-year paper and well as a reopening of existing 2021 and 2041 benchmarks.

“We expect a rougher capital market environment in 2012,” says Paula Martins, an analyst at Standard & Poor’s. “Petrobras won’t have any problem issuing, even if there is difficulty ahead.” Her agency sees credit metrics possibly deteriorating a bit with the massive borrowing ahead, but improving once the discoveries are monetized

With the departure of Gabrielli, some see this as an appropriate moment for CFO Almir Barbassa to also step down after 38 years at Petrobras, but as of mid-February there had been no indication that he would make such a choice.

Energy minister Edison Lobão has said there will be no forced executive changes at Petrobras.

José Alcides Martins replaces Foster as head of Petrobras’s natural gas and power unit. José Miranda Formigli Filho was named as head of exploration and production, replacing Guilherme Estrella, who is leaving the company. LF