The Rising Influence of Rising Affluence

[DewDiligence]

Brazil, Petrobras Ink $42.5B Deal

[If you’re a minority shareholder and you think PBR is paying too much for the oil reserves in question, don’t say you weren’t warned (#msg-51214642).]

http://online.wsj.com/article/SB10001424052748703882304575466361168037990.html

›SEPTEMBER 1, 2010, 9:44 P.M. ET
By JOHN LYONS and JEFF FICK

BRASILIA—Brazil's state-controlled oil giant Petroleo Brasileiro SA has agreed to pay the federal government $42.5 billion in stock to acquire five billion barrels of deepwater reserves, a controversial price because investors say it is more than the oil is actually worth.

Shares of Petrobras, as the company is known, have crumbled this year on investor expectations the oil company would come under government pressure to pay above market price for oil reserves it is acquiring under a recapitalization plan. Petrobras also plans to sell new shares to the public to raise an additional $25 billion in cash under the plan.

The price works out to $8.51 per barrel, more than the $6 to $7 often cited by analysts as fair market value. Setting the price is a moving target because the oil is still deep below the ocean, and it is impossible to know with certainty how much it will cost to bring it to the surface.

Petrobras and federal government negotiators arrived at the price after several months of negotiations. [Calling these discussions “negotiations” is a little silly, IMO, insofar as the federal government of Brazil has a controlling stake in the company.]

Petrobras is acquiring reserves and cash to stock a war chest ahead of its development of massive, but difficult to reach, oil finds off the Brazilian coast. Expectations for soaring revenues from the underwater oil are so high that Brazilian President Luiz Inacio Lula da Silva routinely cites them as a key driver for Brazil's future development [and therein lies the problem].

Petrobras overpaying for the reserves may undermine the value of its tradable shares. It also signals the federal government's willingness to exert more control over Petrobras operations [duh]. Although Petrobras is controlled by the federal government, the company long has operated with a free market ethos for years, and a large number of its shares trade on U.S. and Brazilian market.

Major investors, including billionaire George Soros and asset management mammoth BlackRock Inc., have unloaded Petrobras shares this year.‹