Brazil

Petrobras gets Senate approval for oil-for-stock swap

Petroleo Brasileiro SA, Brazil's state-controlled oil company, won Senate approval to buy 5 billion barrels of government-owned oil with new stock, paving the way for the Western Hemisphere’s largest share sale in more than a decade.

Brazilian senators today voted 44-6 to allow Petrobras, as the company is known, to issue new shares in exchange for the rights to tap government reserves off the South American country's coast. The Rio de Janeiro-based company also plans to raise as much as $25 billion from minority investors in a public stock offering.

Petrobras is seeking to fund as much as $220 billion of spending through 2014, the world’s biggest oil-industry investment program, to develop reserves including Tupi, the largest discovery in the Americas since Mexico’s Cantarell in 1976. The stock-for-oil swap will likely help stoke demand for a share sale because it will increase proven reserves and the potential to boost output, Bill Rudman of Blackfriars Asset Management said.

"It's preferred to have assets involved such as the 5 billion barrels," Rudman, who helps manage about $2 billion at Blackfriars in London, said in a telephone interview. "The market prefers the idea of getting some assets on board."

Petrobras preferred shares rose 1.2 percent to 29.89 reais in Sao Paulo trading at 11:49 a.m. New York time. Before today, the stock has fallen 19 percent this year, compared with a 10 percent decline in Brazil’s benchmark Bovespa index.

Successful Sale

Itau Unibanco Holding SA Chief Executive Officer Roberto Egydio Setubal, speaking in Vienna today, said he expects the share sale to be successful because of the company's program to invest in deepwater oil production. Itau, Latin America’s largest bank by market value, is among banks that Petrobras named as managers of the offering.

Investors now will wait for Petrobras and the government to set a price for the reserves and decide how much stock will be used as payment to estimate any potential reduction in earnings per share, Rudman said.

Brazil's government expects to set a price for the oil reserves by October, Energy Minister Marcio Zimmermann said today. After today's vote, the bill goes to President Luiz Inacio Lula da Silva for a final signature.

"My work is done," Senator Delcidio Amaral, responsible for presenting the final draft of the Petrobras capitalization bill, said after the vote. "Victory for Brazil!"

Banks

Petrobras said on June 2 it named Banco Bradesco SA, Citigroup Inc., Itau, Bank of America Corp., Morgan Stanley and Banco Santander SA to manage the share sale. Banco do Brasil SA will manage the sale to minority investors in the domestic market, Petrobras said today in a regulatory statement.

Brazil's senate also approved today regulation that makes Petrobras the sole operator of fields in the pre-salt region and other "strategic areas," with a minimum 30 percent stake in all joint ventures set up to bid for licenses.

Another bill approved by senators today creates a fund to finance social spending, using revenue to be generated from oil exploration.

After a 12-hour discussion, lawmakers also voted to change oil royalty distribution in the country, boosting revenue paid to states and cities that don’t produce oil. Romero Juca, leader of the government coalition, said that Lula may veto that decision because the bill was not "properly elaborated."

The bills governing the social fund, Petrobras exclusivity and royalties will go back to a second vote in the lower house because senators altered the proposal.

(Published by Bloomberg – June 10, 2010)