Wednesday, September 1, 2010

Petrobras (NYSE:PBR), Brazilian Government Far Apart on Oil-for-shares Swap

Heading into a meeting with the National Energy Policy Council of Brazil, Petrobras (NYSE:PBR) and the government are far apart on the price of a proposed oil-for-shares swap.

The deal centers around Petrobras acquiring 5 billion barrels of oil in exchange for newly issued shares.

Petrobras wants to pay about $5-$6 a barrel, while the Brazilian government wants double that, from $10-$12 a barrel. That huge discrepancy has caused negotiations to drag on far longer than expected.

Once a deal is reached, that's only the first step, as it then must be approved by the CNPE, which is a group of government ministers from different sectors.

Analysts following Petrobras also feel the $5-$6 a barrel is much more in line with the risks involved in drilling in waters that have been largely untested. The value of the oil will determine the amount of capital Petrobras will have to put into the deal.

There are a couple of forces at work here. First, the government of Brazil must seek to get the best price for the resources on behalf of their citizens, which own natural resources under the ground.

Second, the amount it would cost Petrobras to secure the oil rights would heavily dilute the stock, making the Brazilian government a huge shareholder, and force minority shareholders to acquire shares to protect them from extreme dilution, because of their being newly issued.

There is a presidential election coming up in October in Brazil as well, adding another element to the deal, which politicians will want to favor the people in order to influence voting.

Petrobras says it is looking to sell as much as $25 billion in new shares by September for the deal, while the government is still looking at $50 billion.

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