Petroleo Brasileiro SA is launching the biggest global share issue in history this week, a $79-billion (U.S.) deal that will test the confidence of international investors in the state-controlled company's ability to profitably exploit some of the world's largest and deepest offshore oil reserves.
Petrobras, as the company is known, is looking to finance an enormous, five-year, $224-billion (U.S.) capital program that would put it on track to double its production over the next decade, including tapping the massive pre-salt reserves that lie hundreds of kilometres offshore and as much as 6,000 metres beneath the surface.
In the wake of BP PLC's calamitous blowout in the Gulf of Mexico, investors are wary of the risks that accompany such frontier development, through Petrobras has a reputation as one of the world's top offshore operators.
The BP disaster has increased investors' concerns that Petrobras is operating at the extreme of industry practice as it moves to develop fields like Tupi and Guara, which lay under as much as 2,000 metres of salt at tremendous depths, said Christopher Garman, Latin American director at Washington-based Eurasian Group.
Petrobras' share and bond prices have been under pressure as investors are betting the company will have to price the issue attractively to woo investors, and will eventually have to return to bond markets to meet its capital requirements.
Analysts were also unhappy with the $8.51-a-barrel price set for the five billion barrels of offshore reserves that the government swapped in exchange for Petrobras shares - a deal designed to maintain Brasilia's controlling grip on the company.
While the offshore risks have become more evident in light of BP's Gulf of Mexico disaster, the company's fractious relationship with its principal shareholder, the Brazilian government, remains a key issue for investors.
"There are concerns about the ability of the company to meet all the mandates that have been put on its plate," Mr. Garman said
The Brazilian government now requires that Petrobras be the lead operator on all new offshore developments, and is counting on the offshore oil resource to help fuel the country's rapid growth and poverty reduction.
The deal, including a government component, would dwarf the previous record share offering of $36.8-billion by Japan's NTT in 1987, as well as the $22.1-billion initial public offering by the Agricultural Bank of China earlier this year. The Petrobras share issue includes as much as $36-billion that is being offered to minority shareholders.
Petrobras' capital plan is staggering in scope, averaging $45-billion (U.S.) annually, and will boost production 3.9 million barrels of oil equivalent a day from 2.5 million last year. By 2020, Petrobras expects to be producing 5.4 million barrels of oil equivalent a day.
The company has also contracted for an additional 26 deepwater drilling rigs to be delivered by 2015 and more than 200 supply vessels. It also plans to build three new refineries to meet growing domestic demand.
There appears to be a healthy appetite for the share issue among Petrobras' global shareholders. Many sovereign wealth funds are expected to snap up the shares, as a long-term investment in a key emerging market.
"There are obvious governance issues, but the prize is great," said Annette Hester, a Calgary-based associate with Washington's Centre for Strategic and International Studies.
Petrobras has been a top stock pick for many emerging-market analysts in recent years. But the transaction has been delayed for more than two months as the company and government wrangled over its structure.
The share price has suffered from the uncertainty and determination of the government to maintain a firm grip over the company's direction. In August, the hedge fund of billionaire George Soros dumped its entire holdings of Petrobras shares, as investors speculated that the massive share offering would seriously dilute earnings.
Brazil's current President, Luiz Inacio Lula de Silva, is completing his term and his chosen candidate, Dilma Rousseff, is expected to win the election to replace him this fall. The former Petrobras chairman has promised to extend the current's government's anti-poverty efforts, and the state-controlled oil company is a key tool for the government to wield in that pursuit.