Petrobras samba with government may not be over

September 9, 2010

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

Brazil’s government gouged oil giant Petrobras <PETR4.SA><PBR.N> in its $42 billion transfer of offshore reserves. But at least it seemed to lift some uncertainty. Think again: the contract may allow Brazil to raise the price, regulatory filings suggest. For those worried by state meddling, this is yet another troubling disclosure.

Risk factor sections of stock prospectuses often read like religious confessions — with companies admitting to failings they normally downplay. Petrobras’ disclaimer goes right to the heart of investor doubts about its $75 billion capitalization plan; namely that Brazil’s government is increasingly intent on using its captive oil company as an instrument of public policy. This puts Petrobras in the unusual position of admitting that it may actually self-harm — making investments that have “an adverse effect on our results.”

The real bolt from the blue in the filing, however, is that the already harsh terms of the oil transfer deal could be tightened further. At $8.51 per barrel, Petrobras overpaid for the 5 billion barrels it will receive from the government. Assuming a fair value of closer to $5, the transaction transferred around $17 billion of value to the government.

Further haggling on this payment over coming years could lead to a still worse deal for investors. The “novel features” of the contract — as the prospectus terms them without specifics — raise the possibility that Brasilia could snatch any upside potential if the reserves turn out to be more promising than currently assumed.

The uncertainty could be just as damaging as any financial impact. The company’s representatives are for now not elaborating on the prospectus. Investor anxiety over the deal was a principle reason Petrobras lagged Brazil’s benchmark Bovespa index by around 20 percent this year. Yet a final valuation could take up to five years.

Petrobras shareholders are increasingly accustomed to taking second place to voters. With President Lula’s chosen heir holding a commanding lead ahead of October’s election, this is not expected to change. And, to be sure, many investors may be willing to put up with a degree of political interference in exchange for a stake in the world’s fastest growing oil major.

What few will tolerate for long is a sense of perpetual uncertainty about whether their interests will be safeguarded. Petrobras’ seemingly endless samba with the government over oil reserves should make investors think twice about handing over more cash.

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