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Petrobras: Unclear Value Outlook

It is unclear how the planned capitalization of Brazilian oil giant Petrobras will effect the company's share price.

Inter-American Dialogue   

The lower house of Brazil's Congress earlier this month approved the government's capitalization plan for state oil company Petrobras, part of the larger oil reform gradually making its way through the country's legislature. What obstacles is the government's oil reform proposal facing in the congress? Are the measures likely to be approved before the presidential election in October? What would the proposed capitalization of Petrobras mean for private investors in the company?

Georges D. Landau, head of Prismax Consultoria in São Paulo: The four bills comprising the Lula government's proposals for a new regulatory framework for pre-salt E&P and related subjects have almost cleared the Chamber of Deputies, whose approval of the bills was delayed by the opposition. However, the measures face even bigger hurdles in the Senate. The government is confident of passage before the July congressional recess, but in this electoral year that will entail a heavy political price. Curiously, the essential feature of the legislation, namely replacement of the transparent concessions regime managed by ANP (that has yielded such positive results since its enactment by president Cardoso in 1987) by a production-sharing scheme for pre-salt, evoked little controversy in the Congress, but the polemic allocation of royalties, and Petrobras' capitalization, were amply and fiercely debated, with the government having to yield on critical points. Again, the issue of creation of a 100 percent state-owned company, provisionally labeled PetroSal, to manage all pre-salt resources not previously auctioned, was not discussed in any depth, as it should have been. The recapitalization of Petrobras is far less controversial than other features of the legislation, such as giving the company a virtual monopoly on pre-salt E&P, and a minimum 30 percent participation in other companies' pre-salt projects. Such proposals are essentially dissuasive of foreign direct investment in pre-salt operations. Unless the Senate introduces changes in the government's recapitalization scheme, minority shareholders of Petrobras will witness a relative (if small) decline in the value of their holdings. That is not the main issue, however. The corollary of the legislation is that it may strengthen Petrobras, but at the expense of a competitive climate for the future of Brazil's oil industry.

Christopher Garman, head of the Latin America practice at the Eurasia Group in Washington: The largest obstacle to the government's proposal for oil reform rests in the heated debate over how to distribute the royalty taxes from oil production, between producer state governments who currently benefit from the existing taxation structure and nonproducer state governments who want a larger share of the revenue pie. The leadership of the lower house of Congress initially structured a deal between producer and nonproducer states to grant the latter a higher share of taxes over new production, but the government wasn't able to avoid the approval of an amendment that essentially wiped out the benefits accrued to producer state governments altogether. The important point is that the government always has the option to bring the Petrobras capitalization bill to a vote before the new E&P framework, where the dilemma over distribution of royalty taxes lies. I think lawmakers will approve the capitalization bill by May, which will give Petrobras enough time to prepare for an issuance by July. The capitalization may be the largest issuance by a company ever, involving anywhere from $40 billion to $60 billion worth of stock. Existing shareholders are going to have the right to choose whether to accompany that issuance. Whether it will be a positive or negative for shareholders will depend on how the government values the oil reserves being utilized to capitalize Petrobras. Petrobras is giving very clear signals that the entire process will be done in a transparent fashion. But there are concerns that there could be political pressure to have a higher dollar per barrel valuation of these reserves. If the valuation is seen as too high, then shareholders probably will not accompany the issuance and they'll be diluted. But if it's seen as fair, then shareholders may accompany the new issuance and would end up with the same stake in a larger company.

Gianna Bern, president of Brookshire Advisory and Research, Inc. in Flossmoor, Ill.: In Brazil, congressional opponents will claim, among other things, that the current oil regulatory scheme has a successful track record in attracting investment to Brazil. Currently there are over 70 concessions operating in Brazil and most integrated oil majors are looking for opportunities to participate in the pre-salt basins. The current administration is lobbying for congressional passage and I suspect there is a high probability the legislation will pass. Whether it is approved before the presidential election in October remains to be seen. The proposed recapitalization gives investors the opportunity to maintain their current ownership interest in Petrobras if they choose to exercise their pre-emptive rights. In general, Petrobras has done a good job of reaching out to investors and explaining the recapitalization and providing assurances. Petrobras has been a model of what a state-owned national oil company can achieve. Petrobras enjoys considerable access to the global capital markets and I can't imagine they would put that at risk. The question then becomes whether there will be continued interest in the pre-salt basin once the new legislation becomes law. Integrated oil majors are looking for reserve building opportunities all over the globe. All of the low hanging fruit in the industry is gone. Brazil's political stability, economic growth, respect for contract sanctity and extraordinary geological structures make it one of the most attractive places to be in energy. I don't think changes to the regulatory framework will deter investment.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

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