Petrobras Investors Lining Up for Shares (PBR, RDS-A, REP, XOM, HES, OGXPY)

The deal struck by Petroleo Brasileiro SA (NYSE:PBR), or Petrobras, and the government of Argentina has set the stage for the world’s largest ever share offering. The oil-for-stock swap gives Petrobras the right to produce 5 billion barrels of oil in the ultra-deepwater fields offshore of Brazil in exchange for a government investment of $42.5 billion. The total value of the offering could be as high as $75 billion, depending on demand from investors.

Brazil’s ultra-deepwater fields could hold as much as 15 billion barrels of recoverable oil. Other large energy companies, including Britain’s BG Group plc, Royal Dutch Shell plc (NYSE:RDS-A), Repsol YPF SA (NYSE:REP), Exxon Mobil Corp. (NYSE:XOM), and Hess Corp. (NYSE:HES), also have exploration licenses in the area.

Two Brazilian state-controlled banks, the BNDES and Caixa Economica Federal, together with the government’s sovereign wealth fund have been authorized to sell or exchange up to more than 217 million common shares of Petrobras in connection with the offering.

The Brazilian government and its financial units are expected to buy about $46 billion worth of the share offering, according to The Wall Street Journal. The government owns more than 30% of the company’s total shares and about 55% of its preferred, voting shares.

A major concern of current, non-government shareholders was the dilutive effect of such a large offering on their existing shares. Analysts have speculated that minority investors would take up to $12 billion of the new offering, but Petrobras is probably counting on more. In addition to 1.59 new preferred shares and 2.17 new common shares, the company is prepared to sell an additional 564 million shares, depending on demand.

Proceeds from the sale will be used to fund the $224 billion Petrobras estimates that it will spend to develop the fields over the next five years.

Petrobras shares have had a tough year, falling about 20% in the past year. Another Brazilian company, OGX Petroleo e Gas Participacoes S.A. (OTC:OGXPY), essentially a start-up E&P company controlled by Brazilian billionaire Eike Batista, owns rights in the shallow water offshore of Brazil and has seen its ADRs appreciate about 10% in the past year.

Two of China’s largest companies, the Sinopec Group and China National Offshore Oil Company, are considering investments in OGX, according to The New York Times. The Chinese are probably a little leery of investing in ultra-deepwater assets so soon after the blow-out in the Gulf of Mexico, and prefers the shallow water assets that are safer and cheaper to develop. In 2009, the state-owned China Development Bank agreed to lend Petrobras $10 billion in exchange for a long-term supply of oil, so the Chinese haven’t ignored the ultra-deepwater play, but it’s unlikely to want to raise its investment until the oil starts to flow.

The Chinese investment and the coming share offering should put about $22 billion or so into Petrobras’s exploration coffers. That total could rise if Petrobras issues additional shares. The government has authorized a total of $85 billion in new shares, so another $20 billion or so is possible.

Investors worried about dilution might consider that if Petrobras does raise $44 billion for developing its fields, it will be well on its way to funding its total five-year plan and stands a very high chance of doubling its production in ten years. There are few, if any, competitors able to say that.

Paul Ausick