Petrobras Prepares to Price Shares in Largest-Ever Stock Offering

Just over a week ago, Petroleo Brasileiro SA, Petrobras, (NYSE: PBR) reached an agreement with the Brazilian government over how much the company would pay for the right to develop the so-called offshore pre-salt deposits. The agreement will cost Petrobras about $46 billion in stock for the right to produce up to 5 billion barrels of oil equivalent from reserves in six offshore fields.

In addition, the company is also likely to offer up to 2.53 billion shares to minority shareholders at a price still to be determined. Petrobras hopes to raise an additional $32 billion. That’s a total of $78 billion.

The $32 billion will go toward the company’s planned $224 billion expenditures to develop the offshore fields by 2014. It’s an ambitious plan with more than a little risk, but the potential payoff is huge.

Petrobras aims to double its production, to nearly 4 million barrels/day, by 2014 as well. If the company can pull that off, especially at the $45/barrel production cost it calculates, then it stands to make about $150 billion profit on the 5 billion barrels at a crude price of $75/barrel.

Keeping costs under control will be difficult, given that the crude is under thousands of feet of water and thousands more feet of sea floor. As the sole operator of these six fields, Petrobras will have some trouble lining up supply and services providers, which would prefer to have several operators to sell to. There’s also a shortage of qualified workers for the deepwater rigs.

Some analysts also expect Petrobras to go to the bond market as well to raise all the capital it needs. This share offer is just the beginning, and that raises fears of share dilution. Petrobras is expected to set pricing for the offering later tonight.

Paul Ausick