(Bloomberg) -- The first public appearances by Alejandro Narvaez as chairman of Peru’s state-owned oil producer have left investors wary, trying to decipher whether the new administration will be able to deliver a long-awaited turnaround for the troubled company.
Narvaez sent bonds slipping to a three-month low Monday when he forecast Petroperu would lose almost $1 billion this year, with losses extending into 2025. Just days later, they rose after he changed tack to say the heavily indebted company may return to profit next year, adding that it wouldn’t require another bailout by the government.
The market remains skeptical, with the bonds still down since Narvaez was nominated earlier this month. It is easy to see why. He’s the fourth chairman appointed by President Dina Boluarte’s administration in almost two years. Throughout that time, the refiner has repeatedly said a turnaround is near, then asked the government for more money as it staggers under the weight of debt from a new $6 billion refinery.
“There’s no more benefit of the doubt,” Francisco Schumacher, director of Latam Corporate Credit Research at Banctrust Investment, said of Petroperu. “Beyond the plan they present, they have had years of delays and they need to show they can do it.”
While the company’s dollar bonds due 2047 bonds have rebounded from the initial tumble to about 64 cents on the dollar, they’re still down 4.3% over the past month, according to indicative pricing data compiled by Bloomberg. Yields on the notes have risen to 9.3%, from as low as 8.8% earlier this year.
Changing Tone
The bounce followed a change of tone from the newly appointed board. Just days after saying Petroperu was facing a “serious liquidity problem,” the executives pledged to slash expenses by 30% next year. The new leadership, they said on a call with investors Wednesday, is completely different from the previous one, and the company was on the verge of a turnaround.
Narvaez also told Reuters the oil producer would return to profit next year, optimizing the conditions for a partial privatization in the second half of 2025.
Investors aren’t fully sold. Roger Horn, senior emerging-market strategist at Mariva Capital Markets, said the stake sale serves to put a “timing target” on urgent restructuring efforts.
“Since we are skeptical about the timing of optimization, I don’t think a major share sale would happen in 2025,” Banctrust’s Schumacher added.
Turmoil at the Top
Petroperu has posted two straight years of losses, which more than tripled to about $1 billion in 2023. Liabilities soared as the $6 billion Talara refinery came in over budget and late. While executives say the refinery will be operating at 100% capacity next year, it is unclear if the extra revenue will be enough to stem the losses.
The company’s previous board resigned en masse in September, calling Petroperu “unsustainable” and “broke” after the government stalled on a decision to inject new money. Although an aid package eventually came through, it took Boluarte’s administration eight weeks to find replacements — two of whom resigned within 48 hours. Narvaez’s election as chairman was marked by criticism from business groups, who claimed his appointment was politically motivated and wouldn’t help the company’s turnaround.
Still, Prime Minister Gustavo Adrianzen backed Narvaez in an interview with Bloomberg last week and said his leadership had full government support. Adrianzen also said Petroperu would not need any additional government funding.
The company declined to comment for this story, but pointed to a list of almost 20 urgent actions it will take, including cost-cutting, a new strategy to increase its market share in Peru, asset sales and a forensic audit about what went wrong with the Talara refinery.
State Aid
Peru has stepped in twice to support the ailing oil company this year, and another two times in 2022. The last package included taking over its financial obligations with international bondholders and the Spanish Export Credit Agency during the second half of 2024, and implementing a new $1 billion guarantee for a short-term loan from Banco de la Nacion.
The bailouts this year are estimated to have cost Peru about 0.6% of GDP, according to the central bank, weighing on the country’s deficit. Finance Minister Jose Arista told Bloomberg it was unlikely that the government would continue to repay Petroperu’s creditors next year, but didn’t fully rule it out.
For S&P Global Ratings, the comments from new board don’t seem that much different from what others have said. What is supporting the rating is the likelihood that the government will continue rescuing the company if necessary.
“From a standalone perspective, this is a CCC company,” Candela Macchi, managing director at S&P Global Ratings in an interview. S&P rates the company as B, deep in junk territory, with a stable outlook.
“Absent a massive government capital injection, which is probably not forthcoming, bond investors need to see a few quarters of profitability gains,” Mariva’s Horn said.
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