Sao Paulo, Brasil: Front view of an Ipiranga gas station and related AmPm convenience stores

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Ultrapar Participacoes (NYSE:UGP) is a Brazilian conglomerate that is an important player in the gas station, liquids bulk storage and LPG distribution sectors. It also has investments in retail pharmacy and chemistry; however, the company is divesting these investments to concentrate on oil and gas downstream.

Because its margins are narrow, it has somewhat excessive debt for such a low margin company, and its future is unclear after the divestments are carried out, we think it is better to wait and see what happens.

Note: Unless otherwise stated all information has been obtained from UGP’s filings with the SEC.

Ultrapar’s segments

Ultrapar participates in five segments, three of them related to oil and gas downstream, Ultragaz, UltraCargo and Ipiranga, and two of them unrelated and in the process of divestment, Oxiteno and Extrafarma.

Ultragaz was the initial business that generated Ultrapar. Ultragaz dedicates to the retail and wholesale distribution of LPG. With Brazil being a warm country, most of its cities have not built an urban gas network. Gas used for cooking and some other applications is acquired in gas bottles. Ultragaz refills the bottles and sells them to resellers that later transport them near to customers.

Ultrapar started as Ultragaz with a small operation in Brazil’s south. In the 1990s the company acquired the operations of Shell (NYSE:RDS.A) (NYSE:RDS.B) in the country, becoming a national player with 23% participation. Later it also acquired Repsol’s (OTCQX:REPYY) operations in the country. Since then the company has maintained a steady 23% leading position in the market, without expanding market share. The market has also been relatively stagnant.

Brazilian LPG market and Ultragaz participation on it. Graphic with columns by year

Brazilian LPG market and Ultragaz participation on it

Ultrapar’s 2020 20-F annual report filed with the SEC

Ultracargo has concessions lasting several decades in many of Brazil’s main ports to build and operate liquid bulk storage and handling facilities. It is the largest private operator in the segment considering that Petrobras (NYSE:PBR) is a public company. Currently it has a capacity of some 850 thousand cubic meters distributed around the country. The bulk of its capacity is installed in Santos port near Sao Paulo, the most important Brazilian port.

Ipiranga operates 7000 thousand gas stations around Brazil, amounting to 20% of the country’s market. The company, a big downstream player, was acquired and later divided by Ultrapar, Petrobras and Raizen. Ultrapar obtained the stations belonging to the south. Later Ultrapar continued acquiring gas station operations in other areas of the country.

Ipiranga represents 81% of Ultrapar’s revenue and 50% of its operating income. It also represents the only downstream segment were Ultrapar may separate from the control of Petrobras (more on this later).

These downstream segments are where Ultrapar wants to concentrate its attention from now on. However, the company also operates two other unrelated segments that are in the process of divestment.

Oxiteno operates several chemical facilities in different locations in Brazil, Mexico and the US. Oxiteno represents 20% of Ultrapar’s operating income and the company has grown with good margins (7% operating margin). However, because the business is not petrochemicals but rather specialty chemicals, it is not very related.

According to information published in mid-2021, Oxiteno was sold to Indorama Ventures (OTCPK:IVLRF) for $1.2 billion. With a current operating income of R$400 million ($72 million), it was sold for almost 17 times current operating income, a very interesting multiple. Additionally and as we will discuss later, these $1.2 billion could come very handy to improve Ultrapar’s not so great financial position.

Extrafarma operates retail pharmacies in Brazil. The company has not been very profitable and has resulted in a very bad investment for Ultrapar. Extrafarma was acquired in 2013 with 3% of Ultrapar’s shares, then representing $300 million. After suffering several impairments of goodwill without much explanation in the company’s reports, it is in the process of being sold for R$600 million payable in three installments, less than 30% of the original price.

Finally and although it is not considered a segment on itself, Ultrapar also sold ConectCar, a company that provides automatic toll services that has not produced positive net income yet. The company was sold last year to Porto Seguro (OTCPK:PORSY) for R$165 million.

More on Ultrapar’s downstream segments

Because Ultrapar is going to concentrate on Ultragaz, Ultracargo and Ipiranga , some more information about the sector in general will be useful.

The segments represent 90% of Ultrapar’s revenue and operating profit.

All segments differ in their operating margins. Ultracargo is the best with an operating margin of 50%, Ultragaz has some 6% and Ipiranga has a low 2%. Because Ipiranga in turn represents an almost 85% of total revenues, it drags down Ultrapar’s operating margins which have been between 2% and 3.5% for the last decade.

These segments however represent 65% of total net assets, therefore we could speculate that they are better operated than the other segments. Also, and again stretching imagination, we could consider that 65% of Ultrapar’s debt is issued to sustain these segments.

Petrobras and Brazilian downstream

Brazilian downstream cannot be understood without Petrobras. Brazil’s biggest public company, controlled by the Brazilian government, had the constitutional monopoly over the production and import of oil in Brazil up to the 1990s and continues to exercise significant influence in the market because of its sheer size.

For example, Petrobras is almost the sole supplier of gasoline for Ipiranga’s gas stations and LPG for Ultragaz’s operations. Through its market share, and by proxy control from the government, it is able to define profit margins for the whole industry and to define the degree to which Brazilian oil & gas markets respond to worldwide market changes.

Ultrapar’s uncertain income after the divestments

It is not easy to try to estimate the income that Ultrapar will produce in the following years in order to compare it with its current market capitalization because of several reasons.

Insufficient segment reporting

Ultrapar only reports the operating income each segment produces and the assets utilized. This allows us to have a relative idea of the income each segment could generate.

However, this kind of reporting is insufficient for a company going through a process of divestment and with so many different segments. Particularly, the reader would appreciate debt information about each segment, like total liabilities or current financial expenses.

The same happens with divestments in which the sale process, buyer and tentative price were announced, but up to 3Q21, there is no information about specifically which assets and liabilities will be divested. It is not the same to sell Oxiteno for $1.2 billion if it carries some debt with it than to sell clean debt-free assets.

In fact the strategy is also not very well communicated. For example, in their 2020 annual report Ultrapar mentions as part of its main strategy to continue strengthening its non-downstream related business segments, however in 2021 it announced purchase negotiations for all of them. This is either a haphazard fashion of strategy or contradictory behavior.

Changes in downstream

As we have mentioned Petrobras is the de facto controller of the Brazilian oil & gas industry. What adds to the sector’s uncertainty is that Petrobras undergoing important changes, mostly pointed towards privatization and liberalization of the market.

For example, the company privatized its gas station subsidiary BR in 2019. Also, the Brazilian government has mandated the company to reflect the changes in the international markets in the domestic market instead of cushioning them. Additionally, Brazil’s government has in several occasions announced that it wants to privatize the whole company, a difficult issue given the importance the company has in the country.

Most investors would believe that these changes, although uncertain, are all positive, given that liberalization of the market will probably improve it, particularly given that Petrobras works as a monopoly producer for Ultrapar’s supplies.

However, the changes in Brazilian oil are a very sensitive issue in the country, and Brazil is going to elections this year between two polarized positions regarding Petrobras and the industry. In my opinion, if Jair Bolsonaro (right-wing) wins the election, then oil & gas will continue its privatization process, but if Lula da Silva (left-wing) does, the process will probably be reverted.

Ultrapar’s financial position

Being a very low margin business, also capital intensive, Ultrapar’s financial position is key to determine if the company can produce a profit, and how much. Particularly, this analyst prefers to see low margin companies being very careful with capital allocation and especially with debt issues so as not to further reduce margins.

In this respect Ultrapar does not have the best position. According to interim reports for 3Q21, the company had R$17 billion in financial debts, of which almost R$9 billion were dollar denominated.

The company does not pay very high rates, 5% on dollar denominated debt and CDI (interbanking rate) for reais denominated. Also, the company has hedged the cash flows to repay its foreign denominated debt so Brazil’s reais devaluation does not affect it so much (it only has a R$1.5 billion net liability unhedged position).

However, summing up lease payments and trade liabilities, the company goes as high as R$30 billion, and maybe more considering possible but not probable provisions for another R$3.2 billion. This against current liquid assets (including trade receivables) for only R$10 billion.


Ultrapar’s liability maturity schedule

Ultrapar’s 2020 20-F annual report filed with the SEC

It is staggering to compare that debt with the company’s R$1.3 billion in operating profits, although the company reports R$3.2 billion in operating cash flows.

Also, the company has to pay almost R$1 billion in interest between debt and leases, with a shrinking investment base to compensate.

Because the company has deficient segment reporting, we cannot predict the effect of divestments in the company’s balance sheet. Particularly interesting would be to know how much debt will be divested and if they plan to reduce debt with the $1.2 billion promised for the sale of Oxiteno.

Changes in management

Ultrapar is officially going through a management guard change with most of its more senior officers retiring, the ones that commanded the company to where it is today.

Particularly, the vice-chairman of the board and its chairman of the board are planning to retire this year and in 2023 respectively. The company announced that the prospective chairman has recently assumed the role of CEO of the company.

The company has also made changes to the executive structure of its subsidiaries. For example in 2021 it replaced Ipiranga’s CEO after three years in office.


Ultrapar is currently trading at a high multiple of 16 P/E for a company with decreasing revenue and profits in the last decade. Furthermore, it is not possible to estimate the future profit that the company will produce if there is no information about debt and future uses of capital coming from the divestments.

With those uncertainties in place, and a price relatively expensive for a company with decreasing revenue and profits, we believe investing in Ultrapar to be too speculative without sufficient margin of safety to be considered a conservative investment.

However, the company may be interesting in the future depending on the developments regarding its divestments and the movement of its stock price.