How to lose $7bn in a day | FT Alphaville

How to lose $7bn in a day

In many situations, handing a single company a dominant role in a vast and promising new oil project might do wonders for its share price.

But in the case of Brazil’s Petrobras – the world’s fourth-largest oil producer – ambitious plans unveiled on Monday by President Luiz Inacio Lula da Silva for development of the country’s offshore oil fields essentially “stripped Petroleo Brasileiro SA investors of $7bn in a day, the biggest drop in six months”, Bloomberg reported.

Indeed, the combined market cap of Petrobras preferred and common shares plunged a cool 13.3bn reais ($7bn) to 306.5bn reais (between 3.6 and 4.5 per cent) on Monday, from 319.8bn reais on August 28.

Under Lula’s plans, which he loftily termed “an independence day for Brazil”, Petrobras will be the sole operator of all so-called pre-salt oil fields that include the continent’s largest discovery since 1976. The company also will hold a minimum 30 per cent stake in all joint ventures set up to bid for licenses, and the government may boost its ownership of Petrobras in exchange for oil rights, according to Lula’s announcement.

The problem, in the eyes of many clearly unnerved investors, is that nobody believes the Brazilian government is not going to massively boost its stake in Petrobras. Although the oil major is about 62 per cent owned by private investors, the government controls about 55 per cent of the voting rights, according to MSNBC.

In what turned out to be a huge, presidential “sell” recommendation, Lula himself said at a Monday press conference that his plans may allow the state to boost its stake in Petrobras  and ensure most income from oil exploration “stays in the hands of our people”.

As Keith Johnson at the Wall Street Journal’s Environmental Capital blog, noted:

The big question is whether the long-awaited shift really strengthens Brazil and state-owned Petrobras, or whether it backfires by scaring off investment by international oil companies.

“Nobody knows well what the company’s role will be,” David Zylberstajn, former president of Brazil’s national petroleum agency and a professor at the Catholic University of Sao Paulo, told Bloomberg.

According to the Journal’s Johnson, the new rules change the terms for Brazil’s massive offshore oil fields to production-sharing agreements, rather than outright concessions. (More here and here). He continued:

This means that if oil prices soar, as some expect, most of the windfall would accrue to the Brazilian government not the oil companies. Big Oil can live with that. These agreements are the norm in West Africa, where both the companies and nations such as Angola have profited mightily.

That, however, is clearly not how investors saw it on Monday. And, as Johnson concluded:

Still, putting the development of Brazil’s vast oil wealth squarely on the shoulders of Petrobras could test the company. It already plans a rights issue to raise fresh funds to plow into offshore exploration; it may need even more cash if the government’s new rules dissuade the Exxons, Chevrons, and Shells of the world.

On top of all this, as the Journal pointed out in a separate report, some observers are “questioning Brazil’s basic assumption that recovering the oil is a sure thing”. Indeed, the report added congressional debate over Lula’s plan will be heated. Some opposition congressmen said a bigger state role will create opportunities for corruption. “Mr da Silva, however, commands majority support in Congress”.

And that, along with a myriad other things, is undoubtedly what is really bugging investors.

Related links:
Petrobras (PBR): And now they begin to believe me – IKN
Brazil sets rules on exploiting vast oil reserves – FT
Brazil claims stake in oil find – WSJ
Petrobras to have key role in developing Brazil’s offshore oil – MarketWatch