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BRAZIL: Petrobras Discoveries Mean More Debt

Bottom Line: Petrobras has made the largest-ever crude oil discovery in Brazil as estimates for the Libra field are doubled to as much as 12 billion barrels, but the company’s shares are plunging on the news because it’s drowning in debt and the discovery means more spending.

Analysis: On 23 May, Brazilian regulators doubled the estimate for Petrobras’ Libra field to 12 billion barrels, which would normally be a cause for celebration. However, the same day, Petrobras shares on the New York Stock Exchange fell 5.3% to a new low. A 70% stake of Libra will be auctioned off in October, and the winning bidder will determine how much Petrobras ends up profiting from this doubled estimate. Petrobras has the clear disadvantage in this deal because foreign companies will be able to borrow more easily and would give the government more profit in order to win the bid, further lowering Petrobras’ end take. It’s been a long and painful journey for Petrobras since its stocks soared 49% in the spring of 2008 over the discovery of billions of barrels of oil below the salt in the deep-water Santos Basin. Since then its stocks have plummeted and investors have been discouraged at the outlook as spending rises exponentially and revenues take hits over fuel price caps. 

Recommendation: The Libra field is an amazing prospect, but Petrobras is in trouble. It will have to pay a multi-billion-dollar government signing bonus (probably around…

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