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QGOG Betting Investors See Oil IPO Flop Ending: Corporate Brazil

QGOG Betting Investors See Oil IPO Flop Ending
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. Photographer: Rich Press/Bloomberg

QGOG Constellation SA, whose initial public offering will end a two-year energy IPO drought in Brazil, is betting it can buck the trend of oil industry flops as it raises new capital.

The rig operator, one of the world’s 10 largest drilling companies and a supplier to state-run Petroleo Brasileiro SA since 1981, on Jan. 7 filed to raise more than $500 million in an offering. It will be the industry’s first IPO since QGEP Participacoes SA raised $787 million in February 2011. Industrial group Queiroz Galvao SA controls QGOG and QGEP.

QGOG will try to lure investors to take another chance on Brazilian oil after the industry posted the biggest loss among companies selling new shares in the past five years. Startups HRT Participacoes em Petroleo SA, QGEP and OSX Brasil SA have plunged by more than 60 percent since their IPOs, while Petrobras dropped 32 percent since its $70 billion secondary offering in 2010.

“When those other oil companies came to the market, expectations around them were too optimistic, so in the years that followed the IPOs, shares plunged even with companies improving their operations,” said Roberto Altenhofen, an oil and gas analyst at Sao Paulo-based consulting firm Empiricus Research. “QGOG is not a startup. It has a track record that can be checked by everyone, and may have better chances in doing a successful IPO.”

HRT fell 1.2 percent to 4.22 reais at 12:06 p.m. in Sao Paulo. QGEP fell 1 percent to 13.37 reais, and OSX slumped 5.4 percent to 9.31 reais. The benchmark index was little changed.

Deepwater Rigs

QGOG, based in Rio de Janeiro, has been operating for decades. QGOG has nine ultra-deepwater rigs in operation or under construction, according to its IPO prospectus. Its operations generated $575.9 million in the nine months through Sept. 30, up 39 percent from the year-earlier period.

QGOG’s press office declined to comment on the outlook for the IPO, citing a mandatory “quiet period” before the offering. Queiroz Galvao is 80 percent owned by Queiroz Galvao and the rest by private equity firm The Capital Group.

The offering is being coordinated by JPMorgan Chase & Co., Bank of America Corp., Itau Unibanco Holding SA, Credit Suisse Group AG and Banco Bradesco SA, according to a U.S. Securities and Exchange Commission filing.

Energy Versus Consumer

Brazilian energy share sales since the start of 2008 have lost 35 percent, the worst performance among nine industry groups tracked by Bloomberg. Consumer non-cyclical stocks, including credit-card processor Cielo SA and BRF - Brasil Foods SA, performed the best with a 66 percent gain in the period.

“These guys are always likely to have a slightly tougher time in terms of their finding capital or coming to the market,” Nick Robinson, a portfolio manager at Aberdeen Asset Management Plc, which has $15 billion in Latin American shares, said in a phone interview from Sao Paulo. “There’s just not a lot of natural demand for these types of companies at the moment. Investors are much more focused on non-commodity type, domestically driven sectors.”

Local units of French oil producer Perenco SA and Norway-based rig supplier Seadrill Ltd. canceled offerings in Brazil the past two years as the international financial crisis reduced investor interest in emerging markets.

For oilfield service companies, such as QGOG, appealing to investors is especially difficult because of the track record of peers including equipment maker Lupatech SA and shipbuilder OSX, said Saulo Sabba, a director at Banco Maxima SA. Lupatech, which also depends on Petrobras as its biggest client and missed local debt payments three times last year, plunged 56 percent in 2012.

A Lupatech press official, who can’t be named under corporate policy, didn’t immediately respond to questions by e-mail and telephone.

Lack of Success

Investors in Brazil “don’t know of an oil-service success story,” Sabba, who helps manage 500 million reais ($250 million) at Maxima, said in a telephone interview from Rio de Janeiro. “That’s the problem.”

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 last year, while OGX Petroleo & Gas Participacoes SA’s June announcement that its first two wells would miss targets sent shares plunging 40 percent in two days.

Proceeds from QGOG’s listing will be used to pay for two ultra-deep water drill-ships as part of a plan to invest $5.1 billion through 2015, the company said in its Jan. 7 filing. Investments may include takeovers or the acquisition of stakes in other companies.

‘Under a Cloud’

Petrobras’s delays in ramping up offshore output have hurt rival rig operators of QGOG. Ocean Rig UDW Inc. is struggling to do business in Brazil after Petrobras in November canceled plans to charter five drill-ships from the Nicosia, Cyprus-based supplier because of higher-than-expected production costs. Ocean Rig and Pacific Drilling SA are the two largest global suppliers of ultra-deep water rigs, according to James Crandell, an analyst at Dahlman Rose & Co.

“Brazil is under a cloud right now,” Crandell said in a phone interview from New York. “There already are two pure-play ultra-deep water rig companies -- Ocean Rig and Pacific Drilling -- that already fulfill the investor requirement. I’m not aware that Queiroz Galvao has anything unique to Pacific Drilling and Ocean Rig, so it would be another company, similar size.”

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