Dr. P.V. Viswanath

pviswanath@pace.edu

Petrobras Seeks $65 Billion From Share Sale
September 4, 2010, From The WSJ

SÃO PAULO—After disclosing plans for a long-awaited stock offering that would rank as the biggest ever world-wide, Petroleo Brasileiro SA, Brazil's state-run oil giant, must convince private investors that the share sale is as good a deal for them as it is for the Brazilian government.

Petrobras, as the company is known, in a regulatory filing on Friday disclosed plans to offer 3.17 billion new shares in a transaction that could raise as much as $65 billion. If demand proves sufficient, the company said, it could sell an additional 564 million shares in an expanded offering, raising about $10 billion more. The company embarked on a roadshow immediately to drum up demand for the operation and laid out a timetable for its completion over the coming weeks.

The offer is a crucial step for Petrobras to begin financing an ambitious, $224 billion capital-spending plan lasting through 2014. The plan is built around the development of massive new offshore reserves discovered in recent years that are expected to double Brazil's daily output of oil during the period and catapult the country, now the world's ninth-biggest oil producer, into the top five.

Petrobras shares climbed on news of the offer, propelled by relief in the market that the operation would finally proceed after months of haggling between the company and the Brazilian government. The uncertainty this year led Petrobras shares to underperform those of any other major oil producer world-wide, excluding BP PLC, and fare worse than any other major Latin American stock. Petrobras shares lost over $56 billion in market value, or about 28%, through late August, according to Economatica, a Sao Paulo-based research firm.

Now, the company may face a hard sell with private investors, especially considering the massive investments needed to reach deposits that still need years of risky development before they begin to bear fruit. "You don't have to take part in this," said Bill Rudman, a fund manager with London-based Blackfriars Assett Management, which owns about $30 million worth of Petrobras shares. "Given the time horizons for the payoff and the questions in terms of development, investors may want to sit back and watch."

Private investors also have growing concerns about state meddling in Petrobras, which was partially privatized over a decade ago.

Already, investors in recent years have become increasingly wary of a push by the company, at the government's urging, to invest in refining and other ventures less profitable than the offshore exploration at which Petrobras excels. And complaints have increased as the state took a more aggressive role in the company's management following the big new offshore discoveries and redefined rules for how they would be developed.

Now, that role is expected to increase because the government will almost certainly have a greater financial stake in the company once the pending share offer is over. At present, the state owns about a third of Petrobras stock and over half of its voting capital. But mechanisms built into the offer will allow public institutions to take up any slack in private demand for the new stock and could raise the state stake to as much as 40%, government officials have said.

Originally, the share offer was expected to take place earlier this year.

But Petrobras and government officials were at loggerheads over a provision of the transaction that gives the state Petrobras shares in exchange for the rights to five billion barrels of as-yet unpumped oil. Though an agreement was reached earlier this week, giving the government $42.5 billion worth of the new Petrobras shares in exchange for the oil, private investors protested that the price was much higher than a valuation that appraisers hired by the company had calculated.

"That was a reminder to the market that this is a state-run company," said Will Landers, manager of the Latin America fund at BlackRock Inc., which this year has decreased its holdings in Petrobras. Future investments in the company, he added, "aren't a given until we know more about controls over future spending and the return on these heavy investments."

Petrobras, citing the "closed period" during the share offer, declined to comment.

Guido Mantega, Brazil's finance minister, told reporters on Friday he was confident the offer would remain attractive for private investors.

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