Petrobras Share Gap to Narrow on Accounting, Santander Says

The gap between Petroleo Brasileiro SA's preferred shares and voting shares will probably narrow as the Brazilian oil producer changes the way it accounts for currency swings, Banco Santander SA said.

The state-controlled company's preferred stock may trade at a premium of as little as 95 centavos ($0.42), Santander's analysts Christian Audi and Vicente Falanga Neto wrote in a note to clients. The gap between the two classes of shares reached a 11-week high of 1.53 reais on June 14.

Petrobras, as the company is also known, began adopting accounting practices in May that allow exporters to reduce the impact currency fluctuations have on earnings, according to a July 10 regulatory filing. The change will boost 2013 earnings by 4.7 billion reais, Citigroup Inc. analysts Pedro Medeiros and Fernando Valle wrote in a note to clients.

The new accounting method benefits voting shares because dividends on that class of stock are linked to the company's net income, which will not be as affected by currency swings, according to Citigroup's analysts.

Voting shares have risen 7.8 percent to 14.87 reais in the past two days, narrowing the gap with preferred shares to 88 centavos as of 11:28 a.m. in Sao Paulo.

The real weakened 0.4 percent to 2.2640 today, pushing its decline this year to 9.4 percent. The currency's implied three-month volatility, a measure of price swings, increased to 14.2 percent, the highest among major dollar peers after the South African rand.

Taxable Income

A weaker real hurts Petrobras's profit as the value of its dollar-denominated debt increases, Chief Financial Officer Almir Barbassa said in an interview last year. The full effect of the changes won't be felt until the third quarter because it was implemented in May, according to the Citigroup analysts.

While reducing debt service costs, the new accounting policy also increases the taxable income of the world's biggest producer in deep waters, according to Citigroup.

"We estimate the change will lead to 1.8 billion reais in higher taxes paid in 2013," the Citigroup analysts wrote. "In the long term, the change makes it more difficult to forecast Petrobras's results."