Petrobras Bulks Up

Jim Brown
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Petrobras added $70 billion to their coffers on Thursday with the largest share offering in history. Petrobras said in a filing they might sell another 188 million shares over the next 30 days to cover excess demand.

Petrobras needed to raise the money to fund their $224 billion five-year plan to explore and develop their various offshore discoveries from the last three years. Petrobras has discovered what could be more than 50 billion barrels of recoverable oil in deepwater some 200 miles offshore. The finds cover five major fields and several smaller ones.

The subsalt finds are very difficult to drill and produce because of the constantly shifting salt. Petrobras is building over a dozen new ultra-deepwater rigs plus dozens of support craft like floating oil collection and storage systems. The cost of the rigs is estimated at over $600 million each. That order will rise to 40 rigs by 2017. The company has already awarded over $2 billion in contracts for rigs and tankers. The Brazilian oil industry expects to place orders for more than 400 ships, platforms, drill rigs and support vessels over the next ten years. There will be 122 supply ships, and 44 VLCC crude oil tankers. Those will have to be built in Brazil to conform to Brazilian law. OSX Brazil is constructing a $1.7 billion shipyard with Hundai Heavy Industry to handle these construction contracts.

The $70 billion windfall today was heavily over subscribed according to reports from Brazil. That is good since Petrobras lost $70 billion in market cap over the last year as worries over the dilution by the massive offering drove investors away. Reportedly total bids for the new shares were more than 140 billion reais. This included $57 billion from existing shareholders and $30 billion from institutional investors. Sovereign wealth funds from the Middle East and Asia were among the investors buying into the offering. There was also strong demand from U.S. mutual funds. I don't know how much I believe the 140 billion reais number since they were trying to raise $79 billion and only came away with $70 billion. Why was the actual number so much lower if the demand was that high? There was plenty of confusion because some news sources were quoting in the Brazilian currency, the Reais. $1 = 1.72 Reais.

Common shares with voting rights were priced at $17.25 each and preferred shares were $15.30 each. That was only a 2% discount to the closing price on Petrobras shares on Thursday. A total of 3.76 billion shares were to be offered. Of those 1.87 billion shares were preferred and 2.4 billion common. Part of the transaction consisted of a $43 billion oil for shares swap with the Brazilian government. The government sold them five billion barrels of oil to be produced from the new fields in exchange for the stock. This raised the government's percentage of ownership in Petrobras from 32% to just over 50% according to reports.

Petrobras is expected to nearly double its production by 2020 to four million barrels per day. Globally Petrobras currently produces about 2.5 mbpd. Because of the complexity of producing oil from five miles below the surface, 200 miles from land, there are no pipelines or infrastructure. Getting the oil from five miles down and transporting to land is going to be a permanent problem. They can't just connect to the nearest pipeline like you can in the Gulf of Mexico.

Cost is going to be high for this deepwater production. Petrobras estimates it will cost $45 per barrel to produce the oil. As long as prices stay in the $75 range that allows plenty of cushion to cover the transportation, refining and marketing plus the occasional dry well.

It will be interesting to see how the market reacts to the nearly four billion in new shares on Friday. Obviously many of those are not going to trade in the near future and they are long-term holds. However, you can bet there will be some serious shorting attempts in the weeks ahead as the weak holders looking for a post offering pop decide to go elsewhere.

Petrobras is a great company with a terrific future but that government anchor around their neck is always going to be a problem. Chavez has killed his oil sector and Brazil is far more above board than Venezuela. However, whenever you have a goose laying golden eggs it is tough for the government to keep their hands off.

Jim Brown

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