DJ Brazil's Petrobras Shares Attract Bulls Despite 1Q Woes
By JAMIE MCGEEVER
Dow Jones Newswires
RIO DE JANEIRO -- The Brazilian oil sector is opening up. And so are investors' eyes to the rewards
offered by preferred shares in federally-run Petroleo Brasileiro SA, or Petrobras (E.PTB).
The oil giant suffered heavy first-quarter losses from the January devaluation of the Brazilian currency, but
attractive revenue levels, new corporate leadership and the possible de-listing of another Latin American
petroleum heavyweight all combine to paint an upbeat picture for Petrobras.
"The market is very bullish on Petrobras," said Raphael Biderman, oil analyst for Fleming Graphus in Sao
Paulo, who dismissed the company's first-quarter losses as a "one-off event" and is recommending a buy.
Indeed, three of four analysts consulted by Dow Jones Newswires are giving the company a buy
recommendation, with the fourth recommending a hold.
As reported, Petrobras posted a 1.51 billion-real ($1=BRR1.6710) loss in the period, bruised by the effects of
January's tumultuous devaluation. A major positive, however, was an increase in revenue to BRR6.44 billion
from BRR6.22 billion in the same period in 1998.
"Despite the losses, the underlying fundamentals for Petrobras are very good indeed," agreed Frank McGann,
an oil analyst for Merrill Lynch in New York who points to the revenue levels for his intermediate and
long-term buy recommendations.
In January, Petrobras underwent a board-room shake up, which saw president Joel Renno step down after
six years at the helm. His replacement, former banker and economist Henri Phillippe Reichstul, is a man the
market feels will lead the company into the new millennium in the right direction.
"The new board will cut costs and sell off high cost assets in the Northeast (of Brazil) like on-shore wells,
which is good news," said Rodrigo Marques, an oil analyst for Banco Bozano, Simonsen in Rio de Janeiro,
which is also recommending a buy.
Marques said that the cost of producing oil at some of these wells is as high as $25-$30 per barrel, compared
to around $9 per barrel at the off-shore Campos Basin northeast of Rio de Janeiro.
Analysts agreed the appointment of Reichstul shows the government wants to move the oil industry and
Petrobras forward into an increasingly competitive and laissez-faire market, placing a sharper focus on value
for shareholders.
Petrobras Seen Forging Closer Links With Foreigners
This new-look market will be better outlined in the coming weeks, with the country's oil regulatory body -
National Petroleum Agency, or ANP - putting 27 oil blocks up for auction June 15-16.
ANP managing director David Zylberstzajn described it as the first major step toward fully liberalizing the
Brazilian oil sector as Petrobras attempts to compete with all the world's major players.
"I'm convinced Petrobras is competent enough to adapt (to the new market model)," Zylberstzajn said in an
interview last week, pointing out that the company is involved in talks with companies all over the world
which aim to make it even more competitive.
This type of alliance with leading players in the sector is exactly what experts believe Reichstul is angling for,
and which will raise Petrobras' profile in investor circles.
"The ANP blocks could put the company in the spotlight, showing it to be aggressive and growth-orientated,"
said Fleming's Biderman, adding that Petrobras will likely seek to form partnerships with foreign giants rather
than go it alone.
Owing to budget restrictions imposed in the wake of the currency devaluation,
Bozano's Marques agreed Petrobras would likely opt for partnerships in the
bidding process. That would benefit both parties, as newcomers would rely
heavily on Petrobras' extensive knowledge of the local market.
Over the two-day period in June, the ANP will hold a landmark bidding round for 27 land and off-shore oil
and natural gas blocks, in which 42 companies from all over the world are registered to compete.
Zylbersztajn has said in the past that minimum investment in the blocks - from spending on initial seismic
surveys to actual production - would total a minimum $1.2 billion.
In recent days, however, Petrobras has been active in other areas of oil block activity.
As reported last week, it returned 28 blocks to the ANP, and extended the exploration period in another 36.
"This extension will probably lead to more joint ventures, which is positive," said Merrill Lynch's McGann,
adding that it would have been nearly impossible to explore all the blocks in the near-term anyway.
Bovespa Bellwether Status Looms
One of Petrobras' closest partners in recent years has been Argentina's YPF SA (YPF), whose board last
week threw its support behind a $13.44 billion bid by Spain's Repsol SA (REP) for a remaining 85.01% stake
in the company.
Experts don't expect the deal to adversely affect current agreements between the Brazilian and Argentine
giants, such as $1.5 billion in YPF investments in Brazil over the next four and a half years and the opening
of 1,500 gas stations on each other's soil over the same period. However, a YPF de-listing could be a boon
for Petrobras shares.
If this were to happen, Petrobras preferred shares would be the prime target for fund and asset managers
looking to maintain or up Latin American oil-sector holdings in their portfolios.
"For those who want exposure to the sector in Latin America, this could be very positive," enthused McGann,
adding that the stock is already very liquid.
Said Bozano's Marques: "Petrobras could be the only major oil asset in South America, and those (investors)
now in YPF might now migrate to Petrobras."
Analysts predicted other factors, such as the government agreeing to pay all its BRR3.6 billion debt to
Petrobras by August 2000, will push the stock ever closer toward replacing Telebras receipts as the
bellwether stock on the Sao Paulo Stock Exchange's Bovespa Index.
"Although it will be competing with others, Petrobras could well be the main new Bovespa blue chip," said
equity analyst Marcelo Mesquita at Warburg Dillon Read in Rio de Janeiro. Mesquita is nonetheless
recommending a hold.
In the last 12 months, Petrobras preferred shares reached a high of BRR290.00 in May last year, and
slumped to a low of BRR79.00 on Jan. 14 this year, immediately after the central bank moved to devalue the
currency.
The shares closed trading Wednesday 2.3% lower at BRR252.00. The Bovespa slipped 1.2%.
-By Jamie McGeever (5521) 580-9394; jmcgeever@ap.org
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