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

In addition to Petrobras, Britain’s BG Group plc, Royal Dutch Shell plc (NYSE: RDS-A), Repsol YPF SA (NYSE: REP), Exxon Mobil Corp. (NYSE: XOM), Hess Corp. (NYSE: HES) and a few others have stakes in the development of the pre-salt deposits. The government estimates that 27 of 31 exploratory wells have produced oil, a phenomenal rate.

As shown in the illustration, most of the oil is trapped in a rock formation, called the pre-salt layer, underneath a thick layer of salt deposits. There is also some oil in the post-salt layer, on top of the salt deposits, but that is not the area of current interest.

The size of the pre-salt deposits is estimated as high as 30 billion barrels of original oil in place. Recoverable oil estimates are around 15 billion barrels, but that’s on the optimistic side.

Petrobras’ agreement with the government allows the company to issue up to $85 billion in new shares to fund the development of six pre-salt fields. Petrobras aims to spend about $224 billion in the next five years to develop the fields.

Petrobras is expected to proceed with a share offering worth $60-$65 billion by the end of September. The government will receive $42.5 billion in Petrobras shares, and the rest of the funds will be used to fund the company’s development plans.

In an effort to avoid shareholder resistance to such a heavy dilution in their stakes, minority shareholders will have the right of first refusal to purchase shares, either directly with cash or indirectly by purchasing new-issue government bonds.

Petrobras has said it will offer 1.59 billion new preferred shares and 2.17 billion new common shares, according to Reuters. That brings the value of the offering to about $64.5 billion.

Petrobras shares are trading up 2,5% at $36.91 with a strong market and on news of the agreement.

Paul Ausick

While this certainly has no FIFA endorsement, there seems to be more of an “Anti-World Cup Effect” that took place the day after Spain’s Victory.  The ETFs and ADRs of Spain are all lower, with some mixed results in the Netherlands.

Our technical analysis affiliate, Adam Hewison of INO, is looking at the odds of a dollar index rally.  That always throws in a curve ball for ADR analysis.

We are watching the moves in The Ibero-America Fund, Inc. (NYSE: SNF), iShares MSCI Spain Index (NYSE: EWP), Banco Bilbao Viscaya Argentaria (NYSE: BBVA), Banco Santander, S.A. (NYSE: STD), Repsol YPF SA (NYSE: REP), and Telefonica SA (NYSE: TEF).  The moves are as follows today:

• The Ibero-America Fund, Inc. (NYSE: SNF) $5.58, down 0.10;
• iShares MSCI Spain Index (NYSE: EWP) $36.83, down $0.57;
• Banco Bilbao Viscaya Argentaria (NYSE: BBVA) $12.02, down $0.19;
• Banco Santander, S.A. (NYSE: STD) $12.49, down $0.25;
• Repsol YPF SA (NYSE: REP) $22.20, down $0.19;
• and Telefonica SA (NYSE: TEF) $61.10, down $0.56.

And the losing nation, The Netherlands, is seeing the same… iShares MSCI Netherlands Investable Market Index (NYSE: EWN) is not trading any better. It is down $0.10 at $18.53 on only about 68,000 shares.  The standout name in ADRs today is Koninklijke Philips Electronics NV (NYSE: PHG), or Philips Electronics, with a gain of 0.2% to $31.95 for its ADRs today.

Bloomberg noted about a month ago that investors should sell the markets of the nations that were eliminated from the World Cup the day after their losses.

The problem that makes this victory’s conundrum may be a rather simple explanation.  Office betting pools are huge distractions around the Super Bowl for American football in the U.S.  Spain is not exactly known for its workforce having the greatest of work ethics as far as its population is concerned.  Imagine if the U.S. had a game where just about everyone in the country was rooting for the team… the time loss and productivity loss would be enormous.  Spain has had weeks of this distraction, and there are probably more than just a few hangovers in Spain which may last longer than just today (in the Netherlands too for that matter).

With the Dollar/Euro at $1.2595 today, maybe some eyes are still on the currency markets.  It seems that in the world of ADR investing, both sheep and PIIGS get slaughtered.

JON C. OGG

We have outlined the move on each, with a volume analysis and even a 52-week range with a note on the country and industry.

Allied Irish Banks plc (NYSE: AIB) in Ireland saw its banking ADRs rise 18.8% to $3.60 on 8.2 million shares.  That is not even 1.5-times normal volume.  52-week range is $2.35 to $10.42.

Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) in Spain saw its banking ADRs rise 19.7% to $12.36 on over 7.8 million shares, over 4-times normal volume.  52-week range is $9.36 to $19.78.

Banco Santander, S.A. (NYSE: STD) in Spain saw its banking ADRs rise by almost 23% to $12.09 on over 48 million shares, almost 7-times normal volume.  52-week range is $9.07 to $17.89.

The Bank of Ireland (NYSE: IRE) in Ireland, as if you didn’t guess, saw its banking ADRs rise 16.1% to $8.58 on 2.6 million shares.  Oddly, this is only about 50% above normal trading volume.  52-week range is $5.01 to $20.18.

Barclays plc (NYSE: BCS) of the U.K. saw its banking ADRs trade up 17.9% to $19.59 on 8.1 million shares, about 3-times normal volume.  52-week range is $14.45 to $25.68.

Daimler AG (NYSE: DAI) in German saw its auto-maker ADRs trade up 6.23% to $48.39 on 1.22 million shares, almost 1.5-times normal volume.  52-week range is $32.57 to $56.57.

ING Group, N.V. (NYSE: ING) saw its Dutch financial giant ADRs rise over 25% to $8.78 on 15.3 million shares, over 4-times normal volume.  The 52-week range is $6.78 to $18.89.

Koninklijke Philips Electronics NV (NYSE: PHG), or Philips Electronics, saw its Dutch diversified ADRs rise 11.2% to $32.30 on 4.1 million shares, about 3-times normal volume.  52-week range is $17.29 to $36.06.

Repsol YPF SA (NYSE: REP) saw its Spanish oil & gas ADRs trade up just under 12% to $22.19 on 1.88 million shares.  That is 3-times normal volume and the 52-week range is $19.08 to $28.65.

Siemens AG (NYSE: SI) saw its German diversified ADRs trade up 8.9% to $94.25 on 1.12 million shares, almost double normal volume.  52-week range is $63.67 to $103.10.

Telecom Italia SpA (NYSE: TI) rose a sharp 10.75% to $13.08 on 633,000 shares, more than double normal volume.  52-week range is $11.00 to $18.50.

There are of course only a few relative losers, and you might guess them based on history and based on the recent news off our own coast:

Alcatel-Lucent (NYSE: ALU) was one we were going to accuse of being a perpetual loser after its lackluster performance, but BP plc (NYSE: BP) is continuing to fight its demons and it was actually in the red.  Alcatel-Lucent closed up “only 3.57%” at $2.61 and its 52-week range is $2.01 to $4.95; BP closed down 0.6% at $48.75 on over 31 million shares.

There are many things to consider here.  First, part of the reason for the disparity being so different than the US versus 52-week highs is that there is a currency issue and then there is the notion that exposure (or location in) in the PIIGS nations only added pressure.  This bailout package was the equivalent of the TARP.

JON C. OGG

We are seeing moves in the main stocks and funds which track Spain: The Ibero-America Fund, Inc. (NYSE: SNF), iShares MSCI Spain Index (NYSE: EWP), Banco Bilbao Viscaya Argentaria (NYSE: BBVA), Banco Santander, S.A. (NYSE: STD), Repsol YPF SA (NYSE: REP), and Telefonica SA (NYSE: TEF).

S&P notes, “Spain is likely to have an extended period of subdued economic growth, which weakens its budgetary position…”

The negative outlook reflects the possibility of a downgrade if the nation’s budgetary position underperforms more than is currently expected.  The move away from a credit fueled economy will now result in longer-term growth from 2010 to 2016 is what S&P thinks will now be about 0.7% rather than 1.0% previously expected; and S&P expects that the nominal GDP will regain the 2008 level by 2015 rather than 2013 previously forecast.

S&P also sees private sector debt at 178% of GDP, above many of Spain’s peers.  Also noted is an inflexible labor market, where unemployment is expected to reach 21% in 2010.

You know the rest.  High debt, lower GDP, deleveraging, and on and on…

JON OGG

Of that amount, 42% is produced by private oil companies. The largest companies working in the country are Petroleo Brasileiro SA, or Petrobras, (NYSE: PBR), Spain’s Repsol YPF S.A. (NYSE: REP), and Italy’s Eni SpA (NYSE: E). Chevron Corp. (NYSE: CVX), as a result of its purchase of Texaco, is currently involved in litigation claiming as much as $27 billion in damages for environmental violations.

In a move reminiscent of the takeover of Occidental Petroleum’s (NYSE: OXY) Ecuadorian operations in 2006, the government is threatening to expropriate all foreign-owned oil field operations unless the companies agree to re-negotiate existing contracts to increase Ecuador’s share of production revenues.

The government wants to move eliminate contracts what are now essentially production sharing agreements to contracts where the producer would be paid a production fee and re-imbursed for investment costs. Needless to say, the producers like the current system better because they make a lot more money off production that they would off a production fee. Recent contracts awarded in Iraq have set a production fee of $1.90/b. The Ecuadorian government has not specified a fee yet, but it is unlikely to be significantly higher.

The Ecuadorians are following the example of both Venezuela and Bolivia in trying to force production contract changes to maximize revenue from the country’s hydrocarbon deposits. The government expects to sign new contracts within 60 days.

The Wall Street Journal reports that the oil companies have drastically reduced investment in Ecuador, spending just enough to maintain existing output. President Rafael Correa promises to submit a bill to the Ecuadorian Congress to allow him to expropriate the oil assets if the companies do not sign the new agreements.

Repsol YPF, Petrobras, and Eni are likely to cave in rather than lose the revenue, even though the number of barrels is fairly small. The new agreements essentially turn the companies into oil field services companies. That’s not necessarily a bad thing, and if these companies don’t want to bother with it, companies like Schlumberger Ltd. (NYSE: SLB), Halliburton (NYSE: HAL), and other services companies would not turn down the opportunity to operate the Ecuadorian fields for a straight fee. That’s their business model after all.

As in all these cases, the government has the upper hand. The choice for the oil companies is one between two evils.

Paul Ausick

The government has been accused of falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics.  In the past Greece could just arbitrarily devalue the currency and declare a ‘do-over,’ but that is not an option now that they are in the Euro.  In fact, the argument that this has happened throughout modern history is now of no relevance.  If you take the issues and make these a norm, it could even lead ultimately to a situation no different from kicking cast members off the island.

Dow Jones reported earlier that the spread between Greek and German bonds was narrowing with the 10-year Greek government bonds under 380 basis points versus a spread of about 405 basis points seen on Thursday.

Portugal

• Portugal Telecom SGPS SA (NYSE: PT) -0.4% at $10.39

In Ireland

• The Bank of Ireland (NYSE: IRE) -0.7% at $7.36
• Allied Irish Banks plc (NYSE: AIB) +3% at $3.60
• The New Ireland Fund, Inc. (NYSE: IRL) +1% at $6.93

Greek Stocks Are As Follows:

• National Bank of Greece SA (NYSE: NBG) +7.5% at $4.57
• Hellenic Telecommunications Organization SA (NYSE: OTE) flat at $6.96
• Coca-Cola Hellenic Bottling Company S.A. (NYSE: CCH) +2.3% at $23.07
• DryShips, Inc. (NASDAQ: DRYS) -1.4% at 45.73
• Diana Shipping Inc. (NYSE: DSX) -0.6% at $13.77

In Spain

• Spain Fund Inc. (NYSE: SNF) -1.6% at $6.93
• iShares MSCI Spain Index (NYSE: EWP) +0.6% at $43.79
• Banco Bilbao Vizcaya Argentaria SA (NYSE: BBVA) +0.05% at $15.36
• Banco Santander SA (NYSE: STD) +1.3% at $14.20
• REPSOL YPF SA (NYSE: REP) +0.15% at $23.78
• Telefonica SA (NYSE: TEF) -0.6% at $72.43

Where these ETFs, closed-end funds, and stocks close today is likely to depend upon how the US market closes and on the international headlines.  None of these gains are stellar nor do they signal any major betting bias that a recovery or resolution of the Greece issue will instantly recover.  But these are still better than some of the losses we have seen in recent days.

JON C. OGG

The stocks are Banco Bilbao Vizcaya Argentaria SA (NYSE: BBV) and Banco Santander SA (NYSE: STD) as the two big Spanish banks; and watching REPSOL YPF SA (NYSE: REP) in oil and gas and Telefonica SA (NYSE: TEF) in telecom.  There is also a closed-end fund and an ETF: Spain Fund Inc. (NYSE: SNF), with very thin volume and only a market cap of $67 million; and iShares MSCI Spain Index (NYSE: EWP).

The ratings agency said that compared to the expectations when it lowered Spain’s sovereign ratings in January 2009, S&P now believes that Spain will see a more pronounced and persistent deterioration in its public finances.  S&P further cautioned that longer period of economic weakness versus peers is likely.  The outlook also reflects a belief that reducing Spain’s “sizable fiscal and economic imbalances” will require strong policy actions and those actions have not yet materialized.

Spain’s economy went through much of the same property bubble explosion that was seen in California and throughout the Southwestern U.S. with creative mortgages and a land rush mentality.  There is also a very high private sector indebtedness of 177% of GDP in 2009 and what is called an inflexible labor market.

As a reminder, this is different than what we saw in Greece.  Today’s action is an outlook rather than a formal cut, but this is the prelude to further downgrade actions and it is frequent that an action from one ratings agency triggers actions from others.  S&P said that this outlook reflects a downgrade risk within the next two years.

Jon C. Ogg
December 9, 2009

Deere & Co. (DE) Cut to Underweight at JPMorgan.
eHealth (EHTH) Cut to Hold at Argus.
Harmony Gold Mining (HMY) Cut to Underweight at JPMorgan.
Hovnanian (HOV) Cut to Underperform at Credit Suisse.
Repsol (REP) Cut to Underperform at Credit Suisse.

JON C. OGG

Ameristar Casinos (ASCA) Raised to Overweight at JPMorgan.
Barrick Gold (ABX) Raised to Overweight at JPMorgan.
Blackstone (BX) Raised to Outperform at KBW.
Janus Capital (JNS) Raised to Overweight at JPMorgan.
JPMorgan Chase (JPM) Raised to Outperform at KBW.
Kinross Gold (KGC) Raised to Overweight at JPMorgan.
Repsol SA (REP) Raised to Buy at UBS.
SAP (SAP) Raised to Buy at Deutsche Bank.
Tyco (TYC) Raised to Buy at Citigroup.
Wendy’s/Arby’s (WEN) Raised to Neutral at JPMorgan.

JON C. OGG