By Surojit Chatterjee: Subscribe to Surojit's RSS feed
September 2, 2010 3:14 PM EDT
Brazilian state-controlled oil company Petrobas (NYSE.PBR) and the state government said they have agreed on a $42.5 billion oil-for-shares swap that will help Petrobas acquire five billion barrels of deep water crude reserves.
Recently, Petrobas has come under pressure to pay the government above-market price for the oil reserves it is acquiring under a recapitalization plan.
The oil-for-share swap, announced Wednesday, works out to $8.51 per barrel, or well above $5 or $7 cited by analysts as fair market value, given the uncertainties of operating in the relatively untested deep waters.
Petrobas said it arrived at the price after weeks of negotiations with the government. The details of the deal will be released on Friday, it said.
The deal is controversial because Petrobas, though government controlled, has always asserted independence in its operations for years and a large number of its shares trade on the US and Brazilian bourses.
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However, Petrobas has come under pressure recently to acquire reserves and cash to beef up its war chest as it expands its hold over the massive, but difficult to reach, oil finds off the Brazilian coast. Brazilian President Luiz Inacio Lula da Silva has repeatedly cited these oil finds as key drivers for the country's future development.
Market analysts warn that the price Petrobas paid for acquiring the latest oil reserves is at the higher end of the range that Petrobas shareholders would have liked to see the company pay.
Analysts said the deal undervalues the company's tradable shares and will dilute its earnings because to pay the high per barrel price, Petrobas would have to issue more shares to the government.
Petrobas has the approval of its investors to launch an initial public offering (IPO) of up to $85 billion. It has appointed Citigroup Inc., Bank of America Corp., Morgan Stanley and a handful of Brazilian and Spanish banks to manage the share sale. The cash raised will be used to fund the company's $224 billion five-year investment plan, which is aimed at nearly doubling crude oil output to 3.9 million barrels a day by 2014. That would make Brazil the world's fifth-largest oil producer and likely push the country into the top 10 in terms of oil exports.
Moreover, analysts wonder how the two parties could have arrived at the price since the oil is deep below the ocean and it is still uncertain how much it will cost Petrobas to bring the oil to the surface.
According to RBC Capital analyst Nick Chamie, any value above the $5-7 per barrel range "would probably be taken negatively by the market and risks the government or government entities having to purchase part of the public share sale, ultimately leading to a higher government stake in the company."
Shares of Petrobas have already plunged 26 percent in Sao Paulo trading this year on concern it would pay more for the oil than it's worth, further diluting earnings per share. Earlier this year, billionaire investor George Soros and asset management mammoth BlackRock Inc., had unloaded Petrobras shares.
At 10.56AM (EDT), the American Depository Receipts (ADR) of Petrobas were trading 1.20 percent up at $35.49 on the New York Stock Exchange.
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