Analysis: Petrobras sale draws foreign buyers despite risks

NEW YORK (Reuters) - Oil and greed have a history of overshadowing great risk, but for foreign investors drawn to the stock sale by Brazil's Petrobras, avarice once again trumps some big obstacles the state-run oil company faces.

The largest share offering ever has been dogged for months by haggling over how to price a swap of equity for offshore oil rights that gives the Brazilian government a still-bigger stake in Petrobras (PETR4.SA) (PBR.N), which has unsettled many investors.

Yet strong demand for a stock offering worth up to $79 billion -- of which the swap is worth $43 billion -- is a clear sign that investors have put aside any qualms over the deal because of its main attraction: Petrobras' proved reserves could soon rival or even surpass those of Exxon Mobil Corp (XOM.N) -- the largest publicly traded oil company.

"It's the sheer size of the reserves," said Edward Maran, a portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico, when asked why take part in the offering.

Petrobras said its board will hold an extraordinary meeting at 7 p.m. local time (2200 GMT) in Sao Paulo to vote on the final pricing for the offer. If successful, the deal will top Japanese telecommunications firm NTT's (9432.T) $36.8 billion share sale in 1987.

At the end of 2009, Petrobras said it had 12.1 billion barrels in proved reserves of oil equivalent, about half the almost 23 billion barrels that Exxon reported at the time.

The swap will give Petrobras the right to 5 billion barrels of oil, while bidding for new exploration fields in 2011 that Petrobras has preference over is likely to further boost its reserves substantially.

The thinking among investors is Petrobras knows where the best concession areas are. "Foreign drillers want Petrobras as their partner," Maran said.

Maran said Thornburg, which held 11.7 million shares of American depositary receipts in Petrobras as of June 30, is not negative on Petrobras. But he was concerned the government could force economically unsound decisions on the company.

Drilling rigs are being built in the country, and "Brazil is not on a list of major drilling rig builders," Maran said.

The government will look to align Petrobras' investment strategies to their industrial policy priorities, said Christopher Garman, director for Latin America at political risk consultants Eurasia Group in Washington.

"It is a government priority to develop a local service industry, and that may mean Petrobras will have to pay a higher cost for some of their services," Garman said.

For Nick Robinson, who helps oversee $7 billion in Latin American assets at Aberdeen Asset Management Plc's (ADN.L) Sao Paulo office, the swap's price was not unreasonable.

"Our view is that it's not a great deal, it's a pretty good deal," said Robinson, who likes Petrobras for its solid management, quality assets and low-cost production.

But Robinson said Aberdeen was concerned the deal will put $43 billion of assets on Petrobras' balance sheet that will take time to develop and crimp the company's share valuations.

"When you combine that unproductive asset with the fact that they're issuing more shares, it means there's going to be about 30 percent earnings-per-share dilution next year," he said.

Treatment of minority shareholders, which has bedeviled investors in the past in Brazil, also is a concern, Robinson said, even though Dilma Rousseff, the front-runner in next month's presidential elections, is a former energy minister.

"While we don't think she'll do anything to disadvantage Petrobras, we're less convinced she's not going to do anything to disadvantage minority shareholders," Robinson said.

However, the company's five-year $224 billion investment plan provides a safeguard against undue government meddling as Petrobras may need to retap financial markets, Robinson said.

"I hope it provides some comfort," he said.

Another potential snag is that Petrobras has based its capital expenditure plan on $80-a-barrel oil, posing a problem for execution and an invitation to corruption.

"What's the extent to which Petrobras will be the object of political appointments?" Garman said, adding that, "The king to be has always had his eyes on Petrobras."

Yet Garman said there is a silver lining in that the likely key Cabinet members are aware of investors' concerns.

"These are individuals who are pretty pragmatic. They are probably prone to be sensitive to some of the concerns Petrobras has in executing and its execution challenges."

(Reporting by Herbert Lash, editing by Matthew Lewis)