Petrobras Lures Armada as Brazil Oil Bill Advances in Congress

 Petroleo Brasileiro SA may rebound from the worst two-month slump in more than a year as Brazil’s Congress considers giving the state company more offshore oil reserves, said Armada Capital SA’s Eric Conrads and HSBC’s Anisa Redman.

A bill being debated gives Petrobras rights to 5 billion barrels of oil in exchange for giving the government new stock as part of a broader share offering estimated at as much as $50 billion by Credit Suisse. Rio de Janeiro-based Petrobras has fallen 14 percent since Dec. 1, more than the Bovespa index’s 3.4 percent drop, on concern that a delay in Congress to approve the proposal may derail the planned share sale.

“We’ve been using the weakness of the past few weeks to build a position in Petrobras,” said Conrads, a hedge fund manager at Armada, a Mexico City-based partnership with ING Investment Management, which manages about $11 billion in emerging markets. Investors are looking for quick approval “so they can put the capital to work and move forward,” he said in a telephone interview.

Price-to-earnings ratios below rivals and strong financial performance show that Petrobras has been oversold, said Redman, an analyst at HSBC in London. Brazil’s state-controlled oil producer is set to report Feb. 26 that fourth-quarter profit rose to 7.5 billion reais ($4.1 billion), the average estimate of five analysts surveyed by Bloomberg News.

Price-to-Earnings

Petrobras trades at 10.6 times its trailing 12-month earnings, compared with a ratio of 26.8 for Argentina’s YPF SA, 20 for Colombia’s Ecopetrol SA and 18 percent for BG Group Plc, a partner in Petrobras’s Tupi field, the biggest discovery in the Americas since 1976.

During the second half of 2008, “when the market was at its lowest point, the price to earnings were on average above what Petrobras is trading at right now, which logically makes no sense,” Redman said by telephone Feb. 22. “Other companies have actually bounced back from their troughs.”

Redman raised her rating on Petrobras shares Feb. 22 to “overweight.”

Tupi, in Brazil’s so-called pre-salt area, may hold as many as 8 billion barrels of oil, according to Petrobras. Brazilian President Luiz Inacio Lula da Silva submitted four bills to Congress to tighten state control on offshore reserves after Tupi was discovered in 2007.

Lawmakers reconvened this week following the Carnival holiday and started debating the bills yesterday. Investors have been waiting for details on the capitalization legislation, such as where the oil rights will be located and whether they will be close to existing offshore infrastructure, which would make the crude easier to tap, said Roger Oey, an analyst at Banif Investment Bank.

Too Much ‘Uncertainty’

“This uncertainty is hanging there longer than people would expect and is having a negative impact on the shares,” Oey said Feb. 18 by telephone from Sao Paulo. “Once you know the details of the rights offering, then you have room for a rally.”

Petrobras Chief Executive Officer Jose Sergio Gabrielli told analysts that the planned share sale may not be viable if it is delayed into the third quarter, JPMorgan analysts led by Sergio Torres said in a research note Feb. 9. Gabrielli told analysts the “ideal” timeline for the sale is in the second quarter, the analysts wrote.

A Petrobras press official in Rio de Janeiro, who declined to be named because of company policy, said the timing of the legislation’s approval is up to Congress. The company does not comment on its share price, she said.

‘Short-Term’ Outlook

Even if the legislation isn’t approved, “it’s good for the stock price in the short-term, for the next six months, because it removes uncertainty,” said Armada’s Conrads.

The new stock that Petrobras plans to swap for oil rights may be worth about $30 billion, Credit Suisse AG said in a Feb. 10 note to clients. Petrobras may issue about $20 billion of additional stock to minority shareholders, Credit Suisse said.

“Market perception has room to improve,” Sao Paulo-based Credit Suisse analyst Emerson Leite, who rates the stock a “buy,” wrote in the report. “So does the share price.”

Petrobras fell 46 centavos, or 1.3 percent, to 34.19 reais in Sao Paulo trading yesterday.

If the legislation isn’t approved by the end of April, the share sale will likely be delayed until 2011, after the presidential elections, Andres Kikuchi, an analyst at Link Corretora in Sao Paulo, said Feb. 18.

“The price is very low now because of problems with the capitalization” approval in Congress, Kikuchi said. “We expect the stock to start to react after that event.”