Brazilian authorities swallow two-thirds of record Petrobras issue

After the world’s largest-ever share issue the Brazilian authorities have snapped up nearly two-thirds of the stock issued by Petrobras, the Brazilian oil giant.

Together the Brazilian government, the country’s sovereign wealth fund and the National Development Bank hold a 49% stake and a 64.3% share of voting rights in the company.

But because it is still unclear whether the newly elected government will pursue the successful market-orientated policies of the past, some investors are concerned about the oil giant, particularly as the company has diluted shareholders’ positions by issuing the new stock.

Petrobras has become a popular holding among emerging markets and resources fund managers since its rise to become a leading operator with something over 20% of global deep water production.

With the increased ownership by the Brazilian government, however, there is a risk that the government will use its power to impose tighter regulation on the company as well as interfere with drilling plans for offshore oil reserves. (article continues below)

“The ability to chart Petrobras’s course essentially remains with the government, as it did before the capitalisation,” says Allen Good, an equity analyst at Morningstar.

“As Petrobras produces ever greater revenues with increasing production, the temptation for a new president to direct investment towards lower-returning projects with social benefit may well increase.”

Good does not expect the relationship between the government and Petrobras to change significantly

Good does not expect the relationship between the government and Petrobras to change significantly.

Brazilian purchases accounted for 89% of the total issuance, suggesting that the effects on international investors are limited in the short term. The overall outlook for the company appears to be positive as Petrobras can potentially double its resource bases and production volumes over the next decade.

Good warns, however, that uncertainty still surrounds pending legislation and development costs, as well as feasibility in tapping the new reserves.

British fund managers have mixed views. Patrick Edwardson, the manager of the Scottish American Investment Company at Baillie Gifford, is worried Petrobras could become “an instrument of public policy”. Petrobras used to be one of his biggest holdings, but he started selling it in the first half of 2008 and has only 1.1% remaining.