Petroleo Brasileiro, Latin America’s largest company by market value, agreed to pay the Brazilian government $42.5 billion in new stock for the right to develop 5 billion barrels of offshore oil reserves.
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.
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 per cent in Sao Paulo this year on concern it would pay more for the oil than it’s worth, diluting earnings.
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.”
The price is more than the $7.50 per barrel estimated by UBS 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 August 11 report.
High price
Haroldo Lima, head of the Brazilian oil regulator known as the ANP, said in an August 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, 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.
Shares, bonds
Petrobras rose 97 centavos, or 3.7 per cent, to 27.03 reais in Sao Paulo trading yesterday. The yield on the company’s $2.5 billion in 5.75 per cent bonds due 2020 fell to the lowest since August 26, declining to 4.828 per cent yesterday from 4.942 per cent, according to BNP Paribas prices on Bloomberg.
“There is confusion over whether the $8.51 a barrel negotiated number is a pre- or post-tax valuation,” said Jason Kenney, head of oil and gas research at ING Bank in Edinburgh, who does not cover Petrobras stock but follows companies that are partners in the pre-salt area including BG Group, Galp Energia SGPS and Repsol YPF.
“At worst we see the unit valuation being higher than the consensus mid-range in play today, which is positive for all companies exposed,” Kenney said. “At best, the read across could be very positive indeed.”
BG shares climbed 1.4 per cent at 11.42 am in London, Galp slipped 0.9 per cent in Lisbon and Repsol advanced 0.8 per cent 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 September 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 August 19 from Petrobras and the ANP. The ANP, government and company began negotiations on August 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 maximise their results.”
Petrobras in June named Banco Bradesco, Citigroup, Itau Unibanco Holding, Bank of America, Morgan Stanley and Banco Santander to manage the share sale and that Banco do Brasil will manage the offering to minority investors in the domestic market.
CFO Almir Barbassa said on August 13 that the share sale is needed to replenish capital after debt rose to the upper limit of the company’s target.
