Petrobras Rescue Turns HRT Into Biggest Gainer

Petrobras Chief Executive Officer Maria das Gracas Foster
Petrobras Chief Executive Officer Maria das Gracas Foster told reporters on Oct. 16 that HRT has announced “good discoveries” in the area and the companies are evaluating ways to collaborate. Photographer: Jonathan Ernst/Bloomberg

HRT Participacoes em Petroleo SA is posting the best gain in Sao Paulo trading after Petroleo Brasileiro SA stepped in to help the oil startup make money from natural gas deposits deep in the Amazon jungle.

HRT rallied 35 percent this month, the biggest increase on the IBrX Index of the top 100 stocks on the Sao Paulo exchange. It reverses a plunge earlier this year that made it the worst-performing stock in Brazil. HRT and Petrobras, as the state-run producer is known, are studying pipelines and other projects to transport fuel from Brazil’s Solimoes Basin, HRT Chief Financial Officer Carlos Tersandro Adeodato said yesterday.

“If you don’t have Petrobras involved it goes nowhere,” Eric Conrads, who manages $1 billion in Latin American equities for ING Groep NV, said in a telephone interview from New York. Petrobras owns the only pipeline in the area capable of transporting gas to consumers. “The gas monetization of Solimoes has been a pretty good boost for the story,” he said.

Petrobras and newer oil explorers including HRT, OGX Petroleo & Gas Participacoes SA and QGEP Participacoes SA raised at least $76.4 billion in share sales in the past four years after the Americas’ biggest oil discovery in three decades was made off the coast of Brazil. The companies have underperformed the benchmark Bovespa index this year as Petrobras delayed projects, OGX cut output estimates and HRT found only gas and no oil at its Solimoes Basin blocks.

Stock Declines

Rio de Janeiro-based HRT jumped 6.3 percent to 6.38 reais at 1:05 p.m. in Sao Paulo, after earlier rising to the highest since July 3. Today’s gain pares HRT’s year-to-date loss to 44 percent. OGX, controlled by billionaire Eike Batista, declined 63 percent since the start of the year, making it the worst performer on the Bovespa index. QGEP, which held Brazil’s biggest initial public offering last year, is down 29 percent, while the Bovespa gained 1.5 percent.

Petrobras and HRT announced Oct. 15 that they are studying ways to market gas reserves that HRT found near Petrobras’s Jurua field in the Amazon, without providing details of the projects being considered.

HRT’s exploration of Solimos has been in partnership with TNK-BP, BP Plc’s Russian venture with a group of billionaires. Kremlin-run OAO Rosneft announced on Oct. 22 it had agreed to buy TNK-BP from the two groups in a $55 billion cash and shares deal.

The companies are looking into liquefied natural gas and gas-to-liquids projects, as well as fertilizer and power plants that would use the gas produced in the region, HRT CFO Adeodato said yesterday in an e-mailed response to questions. HRT plans to release a report compiled by Degolyer & MacNaughton, an oil-auditing company, on its Solimoes reserves next year, he said.

HRT and Petrobras will study the technical, economic and environmental viability of gas projects in Solimoes, Petrobras said in an e-mailed response to questions Oct. 22. Petrobras declined to comment further yesterday.

‘Good Discoveries’

HRT has announced “good discoveries” in the area and the companies are evaluating ways to collaborate, Petrobras Chief Executive Officer Maria das Gracas Foster told reporters on Oct. 16 in Rio de Janeiro, where the company is based.

“HRT has some proposals for monetizing these reserves, shipping this gas,” Foster said. “We have an agreement to evaluate the potential -- it’s not binding.”

Partnering with Petrobras could make HRT’s Solimoes blocks profitable even if it doesn’t find oil in the area. HRT has so far made five discoveries of only natural gas, which sells for less than crude and is more difficult to transport.

Petrobras pumps more than 90 percent of Brazil’s oil and gas, while HRT hasn’t started production yet. HRT owns 55 percent of the Solimoes Basin blocks and TNK-BP, Russia’s third-largest oil producer, holds the rest.

“If the agreement advances, Petrobras’s capacity and experience in the Solimoes basin are a positive for HRT,” T.J. Conway, a research and advisory manager at New York-based Energy Intelligence Group, said by telephone from Washington.

Low on Cash

HRT, with a market value of $872 million, doesn’t have the cash to build the infrastructure needed to transport gas from the Amazon on its own, Itau analysts Paula Kovarsky and Diego Mendes said in an Oct. 15 research report. HRT may be forced to accept a below-market price for the fuel should Petrobras offer to buy the gas rather than allowing the company to use its pipeline, they said.

“Based on past experience, the offer is likely to come at low prices,” they said in the report and confirmed the comments by e-mail. “The fact that HRT’s current cash position is insufficient to keep up with the needed investments on its own reduces the company’s bargaining power to negotiate with Petrobras or any other potential partner at this point.”

HRT declined to comment on the Itau report.

‘Cash Burn’

HRT said Oct. 2 it may sell a minority stake in the onshore Solimoes blocks after $804 million of spending since 2011 turned up no commercial oil. HRT raised about $1.5 billion in an initial public offering two years ago, estimating at the time that its blocks in Brazil and Namibia may hold a combined 1.53 billion barrels of oil and equivalents.

The company has enough cash to fund operations until the second half of 2014 and is optimistic about finding oil in the region as it expands exploration to the eastern part of the basin, Chief Executive Officer Marcio Mello said last month.

Gaining access to Petrobras’s infrastructure may help it reduce HRT’s “cash burn,” ING’s Conrads said.

“You finally have some positive news,” he said. “It’s a step in the right direction for this company.”

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