Lula Sets Up Petrobras Dividend Rejection, Roiling Markets

(Bloomberg) -- Petroleo Brasileiro SA board members shot down a dividend proposal under pressure from Brazilian President Luiz Inacio Lula da Silva, surprising investors who had grown complacent about the leftist leader’s willingness to interfere with state-controlled companies.

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The move to block a special dividend payment, when the market was expecting more than $3 billion, weakened the Brazilian real and sent Petrobras shares tumbling 12%, erasing $11 billion in market value. The stock had been trading at a 10-year high as recently as last month on optimism over production growth.

Lula directly told Petrobras Chief Executive Officer Jean Paul Prates and his team in a recent meeting at the presidential palace that the company should limit investor payouts and reinvest instead, according to people familiar with the matter. All five government-appointed directors voted against the proposed dividend in a meeting Thursday, along with a sixth board member representing workers.

The decision “heightens the risk perception at Petrobras particularly on the government influence regarding major capital allocation decisions,” said Caio Ribeiro, an analyst at Bank of America, in a note. He said the company may direct more investment to less lucrative renewable energy projects or to acquisitions.

The proposed payout would have been for hundreds of millions of dollars, according to people familiar with the matter. Lula’s office declined to comment.

In a statement, Petrobras said all its governance rules were followed in the dividend vote. “There are no allegations of external interference in this process,” the company said.

The decision was viewed as a win for Mines and Energy Minister Alexandre Silveira, who selected many of the Petrobras board members and, like Lula, has been pushing for Petrobras to boost investments. It’s a loss for the economic team led by Finance Minister Fernando Haddad, who has sought to reassure markets that the administration is budget-conscious and investor-friendly.

Prates — who last week warned in an interview with Bloomberg News that the company would be more cautious on issuing big dividends — abstained from the vote. He has found himself caught between keeping Lula happy and pressure from other shareholders to keep delivering some of the best returns in the industry.

Read More: Petrobras CEO Says Green Energy Shift Means Caution on Dividends

Petrobras’s reserves will remain in a fund designated for dividends, which can be distributed to investors at any time, Chief Financial Officer Sergio Caetano Leite said on a call with analysts. But Lula has been discussing a plan to push for rule changes that could allow Petrobras to tap those funds for investments, Reuters reported, citing unidentified sources.

Read More: Brazil Markets Tumble as Petrobras Dividend Sends Shockwaves

Many investors had been betting that Petrobras would continue showering investors with dividends to help the government, its largest shareholder, shore up public finances. Instead, the company is preferring to keep the cash on hand as it looks to boost exploration spending and make acquisitions in renewable energy as well as oil and gas.

--With assistance from Vinícius Andrade, Martha Beck and Daniel Carvalho.

(Updates with Petrobras comment in sixth paragraph)

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