Brazil's Senate Gives Go-Ahead to Petrobras Capitalization Plans
BRASILIA (Dow Jones Newswires), June 10, 2010
Brazil's Senate approved Thursday the government's complicated capitalization plan for state-run energy giant Petrobras, opening the door to what's expected to be the one of the world's largest-ever share offers.
Under the capitalization plan, Petrobras will receive the rights to explore and produce up to 5 billion barrels of oil from offshore areas currently held by the government. Petrobras will issue new shares to pay for the oil rights, with minority shareholders accompanying the offer.
The Senate approved the same version of the bill that was approved by the Lower House, meaning that the measure will go right to President Luiz Inacio Lula da Silva's desk for signing. President Lula is expected to sign the bill in short order.
Petrobras will then be able to move forward with the massive share offer, which analysts estimate could be valued at between $50 billion and $60 billion. About one-third of the shares will be swapped for the government-held oil rights. The federal oil company will hold a shareholders meeting June 22, when investors will vote to approve a request to increase the company's capital by as much as 150 billion Brazilian reals ($81.3 billion) via the sale of new common and preferred shares.
Petrobras needs the cash generated from the share offer to fund development of the so-called pre-salt oil fields. Petrobras plans investments of between $200 billion and $220 billion in the 2010-2014 period. The presalt finds were made under a thick layer of salt in the Santos Basin off the coast of Sao Paulo and Rio de Janeiro states. The oil lies under more than 2,000 meters of water and a further 5,000 meters under sand, rock and a shifting layer of salt. Development of the fields is expected to be pricey and complicated, given the technical challenges of operating in the relatively new oil frontier.
Petrobras will also use proceeds from the share offer to reduce the company's leverage, allowing the company to once again tap global capital markets in the future.
Petrobras' ambitious development plans pushed the company's net debt-to-capitalization ratio to 32% at the end of the first quarter. The oil company targets leverage of 25% to 35%. By reducing debt ratios, Petrobras can benefit from the heated demand its bond issues typically attract from investors.
The Senate's approval also ended complicated election-year political wrangling that had delayed voting on the bill, which is part of President Lula's overhaul of Brazil's oil laws. Other measures, including bills related to royalties and production-sharing agreements, still need to be approved. Petrobras officials, frustrated by the repeated delays, said in May that the company would go forward with the share offer with or without the oil rights swap. The company wants to complete the sale of new shares before summer holidays in the Northern Hemisphere affect market liquidity.
Uncertainties surrounding the share offer have also weighed heavily on Petrobras shares. So far in 2010, Petrobras' preferred shares were down nearly 17.8% on the Sao Paulo Stock Exchange. The shares have underperformed the benchmark Ibovespa stocks index, which is down 9.9% in the same period.
Petrobras will still need to negotiate a price for the oil rights, although the country's National Petroleum Agency, or ANP, has already discovered two large offshore reserves. The ANP, Brazil's main regulator for the oil and natural gas industry, discovered the Franco and Libra prospects as part of its role in the government's capitalization plan. Franco was estimated to hold recoverable reserves of 4.5 billion barrels of crude oil, second only to the enormous Tupi discovery that started the presalt madness in November 2007. Tupi was estimated to hold between 5 billion and 8 billion barrels of oil equivalent, or BOE. According to ANP President Haroldo Lima, Libra is even bigger.
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