Petrobras: Gov't Investment and Venezuela Woes (PBR)

Petroleo Brasileiro (NYSE: PBR), or what we call Petrobras, has had a busy week.  This stock has recovered handily off of lows from early July, but all summer it has not been able to get above the $45.00 mark for the ADRs.  This week is bringing some pause for concern, even if the developments are likely to go in favor of Petrobras in the long-term.  There is a report of a huge multi-billion injection from the Brazilian government directly into the company, and this is on the heels of a recent refining project in Venezuela seeing a drastic cost increase.

The report out of Valor Economico, one of the top print sources in Brazil, notes that Brazil’s federal government advanced discussions to inject up to an additional 100 billion reals into Petrobras via the union and via an increased ownership stake.  That translates to about $53.4 billion US dollars.  This would be in order to boost investment capacity as Petrobras goes after an untapped count of billions of barrels of oil in offshore reserves.  This is good for the company, but potentially not good for common holders who want to have some control or say.  The government stake would effectively be hiked from an already 55%-plus up to about 70%.  The company gets a huge infusion of capital, but this makes the company less and less attractive from a shareholder voting and control level down the road.

But this comes on the heels of reports Wednesday that Petrobras is effectively tripling its cost projections for the PdVSA refinery joint venture in Venezuela.  The prior estimate of $4 billion has now been put somewhere around $12 billion.  The good news here is that this does not seem seem to be a Hugo Chavez attempt to just take away from the gringos.  Petrobras has increased its production goals for the refinery and it has maintained that this is subject to approval after a formal review.  There was a hike in the cost due to currency fluctuation but also due to higher costs in equipment and the project is apparently close to completion despite cost overruns.  Without going into detail, the discussions and negotiations here on this joint venture have not exactly been the world’s smoothest in the progression.

Petrobras ADRs are trading down 3.1% at $41.35 this morning.  Again, these are all likely to still be wins for Petrobras operations down the road.  But that is not necessarily the case for outside shareholders who want to have a say and a vote (that matters)…

JON C. OGG
August 27, 2009