Brazil oil company Petrobras aims at offshore reserves with $70B stock offer, world’s largestBy Bradley Brooks, AP
Friday, September 24, 2010
Petrobras raises $70B in offer, world’s largest
SAO PAULO — The exploration and production of Brazil’s massive offshore oil reserves is the driving force behind the globe’s biggest-ever share offering.
Petroleo Brasileiro SA, or Petrobras, the South American nation’s state-run energy company, raised $70 billion Thursday through the sale of more than 4 billion common and preferred shares in Brazil and the U.S. Investors took the opportunity to invest in one of the world’s fastest-growing regions for energy production.
The money will fund Petrobras’ ambitious $224 billion, five-year plan to develop offshore fields Petrobras discovered in the last three years that hold more than 50 billion barrels of recoverable oil.
If successful, Petrobras will vault itself and its country into the top tiers of oil and gas producers around the globe. Yet some analysts are concerned that the cost, and an increased role for the Brazilian government, could dampen eventual returns for shareholders.
Petrobras forecasts that by 2014 it will produce the equivalent of 3.9 billion barrels of oil per day when natural gas output is included. That’s equal to what Exxon Mobil Corp., the world’s largest publicly traded oil and gas company, produces today. The increase in market value, to about $220 billion, already moves Petrobras past Royal Dutch Shell PLC and Chevron into second place behind Exxon’s $311.36 billion.
According to the U.S. Energy Department, Brazil is the No. 12 oil producer in the world. If Petrobras hits its targets, Brazil would jump to No. 6, behind Saudi Arabia, Russia, the U.S., Iran and China. This assumes production in those countries stays relatively flat.
Petrobras priced the common shares at $17.30 and the preferred at $15.30. Common shares in the form of American Depositary shares were priced at $34.49, while preferred ADS were priced at $30.59. In Friday trading on Brazil’s Bovespa exchange, the common shares were down 2 percent, while the preferred slipped 1.9 percent. On the New York Stock Exchange, common ADS dropped 67 cents, or 1.9 percent, to $34.92, while the preferred ADS fell 69 cents, or 2.2 percent, to $30.79.
Nippon Telecom and Telegraph’s 1987 share offering that brought in $36.7 billion had been the largest on record.
Brazil’s government received $43 billion in shares in exchange for allowing Petrobras to drill for 5 billion barrels in reserves. That increased the government’s stake to 48 percent from 40 percent, according to Finance Minister Guido Mantega.
Allen Good, an oil and gas equity analyst at Morningstar, said the deal appears to have drawn interest from Brazilian pension funds and sovereign funds from one or more Middle Eastern countries.
Petrobras shares have fallen about 25 percent this year, the worst performance among major oil companies besides BP PLC. That’s due to investor concerns about growing government control of the company and worries that the massive stock offering will dilute earnings.
Exxon shares have dropped about 10 percent so far in 2010, while Royal Dutch Shell has slipped 2 percent. Chevron and ConocoPhillips have gained 2 percent and 8 percent, respectively. BP shares have plunged 34 percent in the aftermath of the Gulf oil spill.
Analysts also note that getting to all the reserves will require Petrobras to “go back to the well” with future stock offerings, thus diluting the value for current shareholders. The company will also have to take on debt to meet its five-year, $224 billion investment plan, said Christopher Garman, the Eurasia Group’s Latin America director.
The price of the 5 billion barrels of oil Petrobras will be allowed to develop in return for the government’s new shares in this week’s offering was set at $8.51 earlier this month.
But the company and the government will revisit that price after Petrobras spends four years exploring six offshore oil fields. If the oil is cheaper to access than originally estimated, or if oil prices have risen and therefore increased the value of the oil, Petrobras may have to pay the government a higher price.
George Shiau, a partner and energy specialist at the utility and energy hedge fund Copia Capital, notes that Petrobras also plans to spend about $75 billion on new refineries over five years.
Brazilian President Luiz Inacio Lula da Silva hails the oil discoveries as an economic savior for 57 million Brazilians living in poverty — 30 percent of the population. The military wants new submarines and jets to protect the crude. Leftist groups want it all nationalized.
Most of the pre-salt fields lie at least 115 miles off the southeast coast of Brazil, more than a mile below the ocean’s surface and under another 2.5 miles of earth and salt.
Petrobras has said it plans to begin production next month at its pre-salt Tupi field, which holds upward of 8 billion barrels of recoverable oil. Tupi alone was the largest oil find in the Western Hemisphere since the Cantarell field in the Gulf of Mexico in 1976.
Brazil state development bank forecasts that money poured into the oil and gas industry will make up 20 percent of all investments in Brazil during the next four years.
“Brazil’s oil sector is already 10 percent of the country’s GDP,” said Garman. “When you look at what will be the engines of growth going forward, it will be increasingly from the oil industry.”
Associated Press writer Jonathan Fahey in New York contributed to this report.
Tags: Brazil, Energy, Latin America And Caribbean, North America, Sao Paulo, South America, United States