May 25, 2011 / 12:50 PM / 8 years ago

Analysis: Brazil oil start-ups shine as Petrobras worries mount

RIO DE JANEIRO (Reuters) - Concerns of mounting political interference at Brazil’s state-run oil company Petrobras are spurring interest in a crop of start-ups seeking to tap the South American nation’s sizable reserves.

Worried that state meddling will push Petrobras toward less profitable activities, investors are eyeing alternatives such as OGX Petroleo OGXP3.SA, which has made extensive shallow water discoveries, or start-ups HRT Participacoes HRTP3.SA and QGEP QGEP3.SA that are largely in the exploration phase.

Though they are dwarfed by Brazil’s state-controlled behemoth, many investors say OGX and its smaller peers are more focused on profitability than Petrobras, have strong corporate governance standards and have no plans to enter refining and logistics — activities that drag down shareholder returns.

“Petrobras continues to be a company that is highly influenced by government decisions,” said Danny Rappaport, who oversees about $111 million in assets for Sao Paulo-based asset management firm InvestPort and is underweight on Petrobras.

Petrobras’ American Depositary Receipts (PBR.N) are down 31 percent since the start of 2010 when investors became nervous about a massive $70 billion share offering that boosted the government’s stake in the company.

Brazil boasts good conditions for start-up oil companies including a stable regulatory environment and vast territory where little oil and gas exploration has taken place.

Petrobras is largely tied up with huge ultra-deep water discoveries in a region known as the subsalt. This has opened up space for new companies to explore other areas such as the Solimoes Basin in the Amazon where HRT is drilling and the Parnaiba basin where OGX has made major gas discoveries.

“In a country with 29 sedimentary basins apt for petroleum exploration, there are opportunities for small, medium and large scale oil companies,” said Milton Franke, HRT’s planning director.

The list of Brazilian independents is set to grow, with initial public offerings planned for British-French firm Perenco and local firm PetroReconcavo. Portugal’s Galp (GALP.LS) has said it plans sell shares in its Brazil unit.


Shares of OGX, controlled by Brazilian billionaire Eike Batista, have nearly tripled since the start of 2009, when it made a string of discoveries. The company has 10.8 billion barrels of potential oil resources.

Rappaport said his fund has replaced Petrobras shares for OGX in some portfolios — even though OGX is not expected to begin oil output until later this year.

HRT, which expects production to start in August, last year raised $1.5 billion in a stock listing, attracting investors with oil concessions in Brazil and Namibia. JPMorgan Chase & Co. expects HRT to invest $2.2 billion by 2013.

Investment banks including Goldman Sachs (GS.N), Morgan Stanley (MS.N) and Deutsche Bank (DBKGn.DE) began coverage of HRT shortly after the company listed its shares in Sao Paulo.

QGEP, a division of the Queiroz Galvao construction group, has 12 oil prospects and four discoveries in Brazil, mostly in the Campos Basin. The company raised $900 million in an IPO in February.

But interest in the smaller firms is unlikely to significantly erode trading of Petrobras.

Combined trading of Petrobras’ shares (PETR3.SA)(PETR4.SA) accounts for about 13 percent of average daily trading volumes in the Bovespa stock exchange. OGX makes up less than 5 percent of trading.

And the share prices of Brazilian independent oil companies are highly dependent on new discoveries, meaning they are likely to be more volatile than Petrobras shares.

OGX shares sank as much as 17 percent in a single day in April after a report showed that the company’s reserves grew less than expected. One month later, its shares rose 8 percent in a single session after it announced commercial viability of two gas fields.

Government intervention has been a key factor in explaining the flagging performance of Petrobras shares.

Brazil’s policy of keeping fuel prices fixed even as oil prices rise — a key part of the government’s fight against inflation — will likely continue hampering margins.

“Before you just had one choice, now you’ve got companies that are alternatives investments for those that want to diversify the risk of Petrobras and stay in the same sector,” said Lucas Brendler, an analyst with Geracao Futuro.

Additional reporting and editing by Guillermo Parra-Bernal; Dave Zimmerman

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