Petrobras $6.8 Billion Surprise Raises Share-Sale Specter

Petroleo Brasileiro SA (PBR)’s decision to pay billions of dollars for new deep-water oil rights increases the chances that the state-run producer will sell shares to raise cash, according to Banco BTG Pactual.

Petrobras, as the most indebted publicly traded oil company is known, agreed to pay 15 billion reais ($6.8 billion) through 2018 to produce as much as 15 billion additional barrels from a region that holds the giant Buzios field, it said yesterday. It is considering selling assets and restructuring other projects to help shoulder the cost.

“We fear that the contract significantly increases the risk that Petrobras will call for a capital increase in 2015,” Gustavo Gattass and Andrea Cardona, analysts at BTG, said in a research report today. “This contract will weigh more on Petrobras (PETR4)’ stretched balance sheet.”

Petrobras shares fell the most in six weeks yesterday and Banco Bradesco SA and UBS AG lowered their ratings to the equivalents of hold from buy following the announcement. Petrobras will pay 2 billion reais this year and the rest by the end of 2018. The stock fell 1.9 percent to close at 17.29 reais in Sao Paulo today.

Chief Executive Officer Maria das Gracas Foster ruled out a share sale twice during a press conference in Rio de Janeiro yesterday. The company may sell as much as $11 billion in assets over the next five years to help make payments while other options include restructuring projects, she said. Oil and Gas Secretary Marco Antonio Almeida said yesterday the deal wasn’t designed to improve the government’s fiscal accounts.

Timing Surprise

“We were surprised by the timing of the announcement and lack of details in the deal,” UBS analysts led by Lilyanna Yang said in a research report. “Why pay upfront cash?”

Petrobras expects to start producing under the contract in 2021 and reach a peak of 1 million barrels a day in 2026, Foster said.

The company has sold exploration assets in regions including the U.S. Gulf of Mexico and Africa to help finance efforts to more than double production by 2020. It has also implemented cost control programs at offshore operations.

“If Petrobras had the financial capability, we would charge 15 billion reais upfront,” Almeida told reporters in Brasilia. “We are providing Petrobras with a great oil area to explore.”

Brazil will aim for a 1.9 percent primary surplus target this year, the Finance Ministry said in a Feb. 20 statement. The primary surplus as a percentage of gross domestic product in the year through April was 1.87 percent.

Share price losses since the announcement reduced a year-to-date gain to 1.8 percent.

Record Offering

“Our reading of this deal is negative,” Bradesco analyst Auro Rozenbaum said in a research report. “Petrobras will need to anticipate payments from the second contract before having started production from the initial contract.”

In 2010, it paid $42.5 billion in shares and cash for the rights to produce 5 billion barrels at a section of the so-called pre-salt region that holds the Buzios field in deep waters of the South Atlantic. It was part of a $70 billion share sale, the world’s largest, that diluted minority holders.

The area holds 9.8 billion to 15.2 billion barrels of recoverable oil in addition to what Petrobras was authorized to produce under the original contract, it said in a statement yesterday.

“This is a great opportunity for Petrobras,” Foster told reporters in Rio de Janeiro. “No other company in the world has the opportunity to work with such great volumes.”

Development Struggle

Petrobras has found as much as four times the amount of crude that it’s authorized to produce at the offshore license. The company is struggling to develop all the oil it has found in other sections of the pre-salt region and investors prefer to see the company increase output than make discoveries after output has been little changed for the past four years.

The arrangement announced yesterday is the first time Petrobras is making “advanced payments” for an oil project, Foster said. The company won’t seek partners for the new area, and high well productivity will reduce the amount of platforms needed to develop the area, Jose Formigli, the head of exploration and production, told reporters.

Petrobras is investing about $100 million a day to expand its capacity to produce and refine crude, contributing to the biggest cash flow deficit of any oil company, according to data compiled by Bloomberg.

Mixed View

While the new contract gives Petrobras $15.6 billion in net present value, the payments add financial risk, Bank of America Corp. analyst Frank McGann said in a report. The project should have a 15 percent internal rate of return, lower than the 18 percent Bank of America estimates for the Libra pre-salt field where Petrobras also has a profit-sharing contract, he said.

“The transaction is very mixed in our view,” McGann said. “This is likely to be viewed as one more sign of a heavy government involvement in the company, which is likely to offset any potential long-term benefits.”

Production under the contract will add an additional 1 million barrels a day to the company’s production, Foster said. There are no limits on how much Petrobras can produce under the profit-sharing contract, Formigli said.

While the initial payments will put a strain on Petrobras, the project probably will be profitable in the long term, Luana Helsinger, an oil and gas analyst at brokerage GBM Grupo Bursatil Mexicano SA, said by phone from Rio.

To contact the reporters on this story: Sabrina Valle in Rio de Janeiro at svalle@bloomberg.net; Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net; Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Robin Saponar

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