Petrobras to buy oil from Brazil for $42.5 billion in stock

Petroleo Brasileiro SA, Latin America's largest company by market value, climbed to a two-week high after an accord to pay the Brazilian government $42.5 billion for oil reserves paved the way for the Western Hemisphere's biggest stock sale in a decade.

Petrobras, as the state-run company is known, rose 1.6 percent to 27.46 reais in Sao Paulo trading at 10:54 a.m. New York time, the highest since Aug. 18. It rose as much as 4.1 percent earlier. The benchmark Bovespa index fell 0.9 percent.

The value set for the reserves will determine how much new stock Petrobras must offer minority investors in a sale estimated at $25 billion. The swap agreement means the offering, which was delayed in June as Petrobras and the government awaited assessments of the reserves, will likely meet a Sept. 30 deadline, Armada Capital SA's Eric Conrads said.

"It removes an overhang from the market," said Conrads, a hedge fund manager at Armada in New York, said in a telephone interview. "The main thing is you won't have any more delays."

Petrobras said yesterday it will pay an average of $8.51 a barrel with new stock for 5 billion barrels of undeveloped offshore reserves after almost two weeks of negotiations with the government. Terms of the sale to minority investors planned for the end of this month will be disclosed on Sept. 3, the company said.

'Biggest of its Kind'

The company plans to issue enough shares to allow the government and minority investors to maintain their stakes. Finance Minister Guido Mantega and Petrobras Chief Executive Officer Jose Sergio Gabrielli yesterday declined to comment on the total value of the offering.

Gabrielli said in March it may raise as much as $25 billion, which would make the offering the biggest in the Western Hemisphere since at least 1999, according to Bloomberg data.

"This is the biggest operation ever done of its kind," Mantega said in Brasilia yesterday. President Luiz Inacio Lula da Silva is "happy" with the price of the barrels, Mantega said.

Before today, Petrobras plunged 26 percent in Sao Paulo this year on concern it would pay more for the oil than it's worth, diluting earnings.

Billionaire George Soros's Soros Fund Management LLC, 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.

High Price

The price is more than the $7.50 per barrel estimated by UBS AG 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 Aug. 11 report.

''The price is high, it doesn't reflect the real risk of operating in these types of conditions,'' said Christopher Palmer, who oversees about $5 billion at Gartmore Investment Management Ltd. in London, in a telephone interview. "If fund managers feel they will be diluted, they may not participate in the way Petrobras's advisers anticipated."

Haroldo Lima, head of the Brazilian oil regulator known as the ANP, said in an Aug. 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.

Lula's Regulations

The planned public share offering will help raise funds for a $224 billion plan to develop offshore fields and boost refinery capacity.

Partners in the pre-salt area include BG Group Plc, Galp Energia SGPS SA and Repsol YPF SA. BG shares climbed 1.4 percent at 11:42 a.m. in London, Galp slipped 0.9 percent in Lisbon and Repsol advanced 0.8 percent in Madrid.

The oil-for-stock swap is part of new regulations from Lula 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 Aug. 19 from Petrobras and the ANP. The ANP, government and company began negotiations on Aug. 20.

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 maximize their results."

Rising Debt

Petrobras in June named Banco Bradesco SA, Citigroup Inc., Itau Unibanco Holding SA, Bank of America Corp., Morgan Stanley and Banco Santander SA to manage the share sale and that Banco do Brasil SA will manage the offering to minority investors in the domestic market.

Chief Financial Officer Almir Barbassa said Aug. 13 that the share sale is needed to replenish capital after debt rose to the upper limit of the company's target. Debt as a percentage of equity rose to 34 percent in the second quarter, from 32 percent in the previous quarter and 28 percent in the year-earlier period, Petrobras said in its earnings report.

(Published by Bloomberg - September 2, 2010)