beyondbrics

Brazil’s state oil company Petrobras said yesterday that it will “pay” the government $8.51 per barrel for the rights to 5bn barrels of oil.

How did the two sides reach the $8.51 figure for the oil lying under the Atlantic ocean? As many investors feared, politics seems to have played a key role – and minority shareholders could be the big losers.

Petrobras plans to raise capital later this month in one of the biggest share issues in global corporate history. The Brazilian government has agreed to buy new shares in Petrobras up to at least the value of the 5bn barrels.

That’s why the price per barrel is so important: the higher the value, the higher the price of the new shares, and the less likely it becomes that minority shareholders will buy their full allocation. This will leave the government to pick up the leftovers, increasing its stake in Petrobras and leaving minority shareholders diluted.

President Lula da Silva signalled the government’s aggressive stance  on Wednesday before the valuation was announced:

If we go around saying it’s up to [minority] shareholders to set the price, there’s no point, because they want the lowest price possible.

People need to understand the following: the oil belongs to the Union and it’s the Union that will set the price it considers to be fair.

The price of $8.51 was reached after Petrobras and the ANP, the industry regulator, each commissioned valuations from outside consultancies. The price suggested to Petrobras was between $5 and $6 per barrel. The ANP’s advisors suggested $10 to $12. That left the government plenty of leeway.

“It was a political decision,” Erick Scott of SLW, a São Paulo brokerage, told beyondbrics. He reckons the government will end up owning about 38 per cent of Petrobras’s total capital, up from 29.6 per cent today. (Like many Brazilian companies, Petrobras has both voting and non-voting stock. The government has a majority of voting stock.)

Petrobras is authorised to raise up to 150bn reais ($86bn). With the government now committed to $42.6bn ($8.51 x 5bn), minority shareholders may be asked to come up with about the same amount – widely seen as a very tall order.

The company is due to reveal full details of the share issue, including its total value, on Friday September 3.

Related reading:
Petrobras looks to raise $25bn with share issue, FT
Petrobras profits exceed expectations (August), FT
Tensions surround Petrobras share issue, beyondbrics