Sure Petrobras raised $67 billion but here’s why I think investors should see it as a failure

Cheers or brickbats for the Petrobras (PBR) share offering last Friday, September 24, in Sao Paulo?

 The Brazilian government is leading the cheers. President Luiz Inacio Lula da Silva gushed on September 24 that Petrobras had successfully concluded the biggest sale of shares ever. “It wasn’t in Frankfurt. It wasn’t in London. It wasn’t in New York. It was here in Sao Paulo.”

 Petrobras raised $67 billion in the sale. No doubt about it–that is a lot of cash.

And the brickbats? Some spoil sports are pointing out that the sale wasn’t quite as big as advertised before the fact.

Demand from private shareholders who already owned shares of Petrobras and who were therefore entitled to buy more shares in the rights offering was less than expected. And it looks like the government wound up buying 65% of all the shares sold.

The offering was oversubscribed (in other words, buyers put in bids for more shares than were on offer) by about 30%. No mean feat when you’re trying to sell such a big offering. But not anywhere near the 100% oversubscription rate that was the talk of the markets before the offering.

In fact, it looks like Petrobras and its team of investment bankers decided to cut the size of the offering from a potential $77.2 billion (once all extra shares were sold) to $67 billion in an effort to make sure that the underwriting syndicate would not have to lower the price of shares to get them all sold.

I’d toss a slightly different brickbat. Read more

Selling $81 billion in Petrobras stock may create bargains–elsewhere in Brazil

Call it the Petrobras effect: The planned sale of $75 billion—whoops, hold that—yesterday Petrobras announced it would sell an additional $6 billion–in stock by Petrobras (PBR) is weighing down the entire Brazilian stock market.

And statements like this by Jeff Lu, who manages the biggest investment fund in china, China Asset Management, sure don’t help: The offering is “not very attractive,” Lu told Bloomberg. “The profitability is not very great.”

It wouldn’t be easy to get global financial markets to swallow $81 billion in stock in any case. (The $81 billion includes $42.5 billion in shares that the company will use to pay the government for 5 billion barrels of undeveloped offshore oil reserves from the Brazilian government.)

And digesting a deal of this size isn’t made any easier by investors’ suspicion that Petrobras will have to come back to the well not so far in the future. The company estimates that it will need to finance $224 billion in investments through 2014.

But the biggest hurdle may turn out to be the company’s lagging profitability. Read more

Update Petrobras (PBR)

Disappointment on Petrobras (PBR). Although it’s disappointment that investors will ultimately get over.

The government is charging Petrobras more than expected to buy 5 billion barrels of oil reserves. (Pre-transfer the company has proven reserves of 15 billion barrels.) The price of $42.5 billion, to be paid in new stock, works out to $8.50 a barrel. That’s more than the $7.50 oil industry analysts had been expecting.

And since the price determines not only how many new shares the company will issue to the government, but also how many shares it will have to offer to minority shareholders in a related rights offering, the higher price works out to a lot of dilution for existing shareholders. The company will sell $32.5 billion in shares in that rights offering.

The total of $75 billion is more than three times larger than the $22.1 billion raised in the Agricultural Bank of China initial public offering. That offering is the largest IPO ever

The deal with the government is part of a complicated financing package. The government gets a bigger stake in the oil company and its recent finds in the deep waters of the South Atlantic and in exchange Petrobras gets 5 billion barrels of reserves that it can use to back addition loans.

That’s not exactly a minor benefit since the company has estimated its capital spending needs at more than $224 billion over the next five years.

But this is exactly where it gets tricky. Read more

Update Transocean (RIG)

One robin doesn’t make a spring. And one new drilling contract with a higher price than the expiring one doesn’t make a turn in the drilling sector. But springs are built one robin at a time and turns in depressed industries begin with a single contract.

And that single contract leads me to nudge up my target price for shares of Transocean (Rig) in my Jubak’s Picks portfolio.

On July 20 Petrobras (PBR) announced that it would lease a deepwater drilling rig from Transocean at a rate of $510,100 a day. That’s a 4% increase from what Transocean got on the rig, the Cajun Express, during the contract with Chevron (CVX) that expires at the end of 2009.

A 4% increase isn’t much–hey, it might just cover the loss from a weaker dollar–but considering that the last news from Transocean was that it had stacked—that is temporarily pulled out of service—nine rigs with the definite possibility of stacking another five to 10 in 2009–even a small increase qualifies as good news. Day rates for its jackup drilling rigs had tumbled 40% from their peak in 2008. But that’s actually a pretty decent performance. In the collapse from 1997-1999 rates fell by 70%. The rebound in drilling activity isn’t at hand—although the climb in oil prices back to $70 a barrel sure helps—but with 136 ocean drilling rigs (including 39 deepwater rigs) Transocean is by far the best positioned company in the world to profit from a post-recession expansion of deep water drilling.

If you’re looking for signs that the good news from Transocean and Petrobras isn’t evidence of some widespread turnaround in the oil service sector, you don’t have to look any further than Schlumberger (SLB). Second quarter profit at that company fell by 57% on the collapse of drilling activity in N orth America. Revenue fell 18% in the quarter from the second quarter of 2008. The only good news? Management says it sees signs of “stability.” That’s not the same as “improvement.” In this case I think it simply means that while business is still getting worse, it’s now getting worse at a more orderly pace.

As of July 28, I’m upping my target price for Transocean to $91 a share by March 2010 from my previous target of $85 by that date. (Full disclosure: I own shares of Transocean in my personal portfolio.)