Petrobras Set for Record Share Sale - Analyst Blog

Brazilian state-run energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A. , is expected to price the biggest global share issue in history late on Thursday. The stock offering of up to R$134 billion (or $79 billion) will see the Brazilian government receive shares (worth about $42.5 billion) against the transfer of rights for up to 5 billion barrels of deep-sea pre-salt oil reserves (oil deposits located in the sea bed under thick layers of salt) to Petrobras.

The Rio de Janeiro-based integrated major plans to use the multi-billion dollar capital infusion to help finance its ambitious 2010-2014 strategic plan, with projected investments of $224 billion during the five-year period. Petrobras will require huge capital expenditure to develop the deep pre-salt layers as part of the company’s strategic initiative to ramp up production from the current 2.5 million barrels of oil equivalent per day (MMBOE/d) to 3.9 MMBOE/d in 2014 and 5.4 MMBOE/d in 2020.

Following the share sale, the government will boost its stake in Petrobras, where it already controls more than 55% of the voting power. This has led to investor skepticism regarding heightened state interference in Latin America ‘s largest company by market value. Additionally, there is apprehension that the share sale would seriously dilute Petrobras’ earnings. Due to these concerns, the company’s stock price has slumped almost 30% this year – the second most worst performing oil major after the beleaguered British giant BP Plc (BP). However, the offering is still expected to see strong investor demand on the back of Petrobras’ access to enormous crude oil reserves.

Petrobras ADRs currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.