Petroleo Brasileiro SA, Latin America’s largest company by market value, agreed to pay Brazil $42.5 billion in new stock for the right to develop 5 billion barrels of offshore oil reserves. The shares gained. Petrobras, as the state-run company is known, will pay an average of $8.51 a barrel for the oil after almost two weeks of negotiations with the government, according to a regulatory filing yesterday. More than half the oil will come from the Franco field in the offshore Santos Basin, the company said.
“Today Petrobras enters a new phase of stock performance where investors are going to focus more on the fundamentals of day-to-day performance than noise about the capitalization,” Max Bueno, an analyst at Sao Paulo-based Spinelli Corretora, said today in a telephone interview. “I think the market was already factoring in the price that we know now.” The value set for the reserves will determine how much new stock Petrobras must offer minority investors in a related public offering to raise funds for a $224 billion plan to develop offshore fields and boost refinery capacity. Petrobras has plunged 26 percent in Sao Paulo this year on concern it would pay more for the oil than it’s worth, diluting earnings.
The price is more than the $7.50 per barrel estimated by UBS AG analyst Lilyanna Yang and Ted Harper, who helps manage about $6.8 billion at Frost Investment Advisors in Houston. A price of $7.50 a barrel or higher would force Petrobras to sell more shares to the government than investors expect and dilute earnings, Yang said in an Aug. 11 report.
‘At High End’
The price is “certainly at the high end” of what investors and analysts were expecting, said Gianna Bern, president of Brookshire Advisory & Research Inc., based near Chicago. “Market conditions right now are less than desirable, but Petrobras has a good long-term growth story.” Petrobras rose 79 centavos, or 2.9 percent, to 27.82 reais as of 10:25 a.m. in Sao Paulo trading, after gaining 3.7 percent yesterday. The shares have declined about 24 percent this year.
High Price
Haroldo Lima, head of the Brazilian oil regulator known as the ANP, said in an Aug. 12 interview that $8 a barrel would be a “reasonable price” for the reserves. About 3.1 billion barrels of the reserves will come from Franco, Petrobras said in yesterday’s statement, while the Iara and Florim fields will account for another 1.07 billion. Petrobras, based in Rio de Janeiro, will also receive the rights to oil at Tupi Northeast and Sul and Guara East fields. “This is the biggest operation ever done of its kind,” Finance Minister Guido Mantega said in Brasilia yesterday.
Billionaire George Soros’s Soros Fund Management LLC, which oversees $25 billion, sold its Petrobras stock in the second quarter, dumping its biggest company holding. BlackRock Inc., the world’s biggest asset manager, and Banco BTG Pactual SA also sold Petrobras in the quarter, according to Bloomberg data. Partners in the pre-salt area include BG Group Plc, Galp Energia SGPS SA and Repsol YPF SA. BG shares climbed 1.4 percent at 11:42 a.m. in London, Galp slipped 0.9 percent in Lisbon and Repsol advanced 0.8 percent in Madrid.
Maintaining Stakes
Petrobras, which aims to carry out the share sale by the end of this month, said in the regulatory filing it expects to disclose the terms of the offer on Sept. 3. The company plans to issue enough shares to allow the government and minority investors to maintain their stakes. The sale was delayed in June as the company and the government awaited independent assessments on the value of the reserves. Mantega and Petrobras Chief Executive Officer Jose Sergio Gabrielli yesterday declined to comment on the total value of the share sale. The oil-for-stock swap is part of new regulations from President Luiz Inacio Lula da Silva late last year to increase government control over reserves after Petrobras discovered the Tupi field, the largest oil find since Mexico’s Cantarell in 1976. Lula received two separate independent valuations on the crude reserves on Aug. 19 from Petrobras and the ANP. The ANP, government and company began negotiations on Aug. 20. Lula is “happy” with the price, according to Mantega.
‘Commercial Transaction’
Petrobras said last month it was treating the price talks as a “commercial transaction” and that “it’s natural that both parties would seek to maximize their results.” Petrobras in June named Banco Bradesco SA, Citigroup Inc., Itau Unibanco Holding SA, Bank of America Corp., Morgan Stanley and Banco Santander SA to manage the share sale and that Banco do Brasil SA will manage the offering to minority investors in the domestic market. Chief Financial Officer Almir Barbassa said Aug. 13 that the share sale is needed to replenish capital after debt rose to the upper limit of the company’s target. Debt as a percentage of equity rose to 34 percent in the second quarter, from 32 percent in the previous quarter and 28 percent in the year-earlier period, Petrobras said in its earnings report. ”The price is high, it doesn’t reflect the real risk of operating in these types of conditions,” said Christopher Palmer, who oversees about $5 billion at Gartmore Investment Management Ltd. in London, in a telephone interview. “If fund managers feel they will be diluted, they may not participate in the way Petrobras’s advisers anticipated.”
