Petrobras & Vale Strike a Deal

Petrobras (PBR - Analyst Report), the Brazilian state-run oil giant, yesterday announced its plans to form a joint venture with Vale (VALE - Analyst Report), Brazil’s biggest aluminum producer, to explore natural gas and oil. According to the agreement, VALE will help Petrobras beat potash deposits in the Amazon, and VALE will receive cost-effective natural gas to produce the metal.

Additionally, PBR through its subsidiary, Petrobras Energía, has recently erected a new power generation unit in Argentina in order to meet the increasing industrial demand for power in Argentina.

Based on the increase in the number of projects, the company estimates an investment of US$ 174.4 billion during 2009-2013. Thus, PBR raised US$32.5 billion in credit in Brazil and abroad, out of which the Brazilian Development Bank (BNDES) financed US$12.5 billion, and the Chinese Development Bank (CDB) financed US$ 10 billion repayable over 10 years.

US $2 billion was approved by the US Export and Import Bank, US$ 1.5 billion was issued in Global Notes on international capital market, and US$ 6.5 billion was borrowed from domestic and foreign commercial banks. The company plans to refinance US$ 5 billion out of the US$ 6.5 billion loan by selling debt in parts of US$ 1 billion for two years.

The U.S. Energy Information Administration (EIA) has forecasted a drop in demand for oil by 1.8 billion bpd this year and that crude prices would reach approximately $52 in 2009 and $58 for 2010. Although the downswing would depress valuations in the short term, an increase in the number of new projects will definitely boost the shares of the company in the medium to long term. Thus, we continue to have a positive view on PBR and Ultrapar (UGP - Snapshot Report).

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