Worst Brazilian IPOs Follow Dry Oil Wells of QGEP, HRT

QGEP Participacoes SA (QGEP3) and HRT Participacoes em Petroleo SA (HRTP3), the oil startups that held Brazil’s biggest initial public offerings in 2011 and 2010, are the worst performers after discoveries disappointed investors.

QGEP has plunged 56 percent in Sao Paulo from its offer price in February 2011 and reached a record low last month after its partner, Petroleo Brasileiro SA (PETR4), failed to find oil or natural gas at QGEP’s costliest well. HRT reported two dry holes at its Amazon fields, which it said held “super giant” reserves, causing shares to fall 53 percent since October 2010.

“It’s a question of show me the money, show me the assets,” Oliver Leyland, who helps manage 1 billion reais ($491 million) in stocks at Mirae Asset Global Investments in Sao Paulo, said in a telephone interview. “The problem with them is the exploration assets they bought have yielded nothing.”

Five years after Petrobras made the largest crude discovery in the Americas in more than three decades, oil companies in Brazil are struggling to boost output amid delays in getting drilling rigs and bringing projects online. Petrobras, Brazil’s biggest producer, pared long-term output forecasts in a $236.5 billion investment plan last month, while OGX Petroleo & Gas Participacoes SA’s June 26 announcement that its first two wells would miss targets sent shares plunging 40 percent in two days.

‘Disappointment’

QGEP, based in Rio de Janeiro, rose 1.3 percent to 8.44 reais yesterday, paring its year-to-date loss to 49 percent. HRT, also based in Rio, slumped 48 percent this year. The MSCI Brazil Energy Index dropped 23 percent in 2012 compared with a 5.6 percent decline for the benchmark Bovespa index and a 13 percent slid for oil futures on the New York Mercantile Exchange

“The energy sector in Brazil really has been a disappointment,” said Eric Conrads, who helps manage $1 billion in stocks at ING Groep NV in New York. “It’s going to take more time and you have to take a discount for that.”

QGEP said June 1 that Petrobras failed to find commercial volumes of oil and natural gas at four separate geologic layers of the Ilha do Macuco well, where QGEP invested $70 million and has a 30 percent stake. QGEP and Petrobras will study the well results before deciding if they will continue exploring or return the license to the government, Chief Executive Officer Lincoln Guardado said in a June 1 conference call with analysts.

QGEP has enough cash to cover investments and buy stakes in existing projects, Chief Financial Officer Paula Vasconcelos da Costa said in a June 10 telephone interview. QGEP will turn to debt rather than equity markets if it needs funding, Costa said.

Seeking Opportunities

“The company has a comfortable cash position today,” she said. “The company continues to look for opportunities to expand its portfolio.”

HRT has drilled at least two dry holes in the Solimoes basin in the Amazon since it started exploring last year, according to information on the company’s website. In January 2011, Chief Executive Officer Marcio Mello said in an interview that the basin may hold “super giant” deposits.

At its other wells, HRT has mainly discovered small quantities of natural gas, which sells at a discount and is more expensive to transport than oil.

Solimoes “is a world class asset with significant untapped potential that we will continue exploring,” HRT Chief Financial Officer Lourenco Bastos-Tigre said yesterday by e-mail. The company’s share drop is in line with global peers, he said. “It is only natural to expect that HRT should be influenced by a more risk-averse investment climate worldwide.”

Bargain Price

QGEP shares are a bargain after its market value of $1.1 billion fell below the value of the oil explorer’s assets, according to energy consultant Tudor Pickering Holt & Co. Based on cash holdings and proven and probable reserves, the shares are worth 9.50 reais apiece, Tudor estimates, compared with a closing price yesterday of 8.44 reais.

“Essentially you get the rest of the portfolio for free,” Matthew Portillo, an oil analyst at Tudor, said in a telephone interview from Houston. “QGEP is our top pick in Brazil.”

Exxon Mobil Corp., the world’s largest oil company by market value, has lost 0.5 percent this year while PetroChina Co. and Royal Dutch Shell Plc, the world’s second-and third- biggest producers, fell 2 percent and 7.2 percent, respectively.

The shares of small oil exploration companies like QGEP and HRT are hit harder when they report dry holes than larger rivals because they have limited exploration assets, Leyland said.

“Negative news flow from any particular block can cause a massive movement in the share price,” he said. “That’s the nature of the beast. Anybody who isn’t comfortable with that risk profile shouldn’t be in anyway.”

To contact the reporter on this story: Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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