It’s Time for a Liquidity Event

By Chris Marasco - September 12, 2012 | Tickers: CHK, CVX, NES.DL, PBR, TOT | 0 Comments

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Chesapeake (NYSE: CHK) CEO Aubrey McClendon has been tasked by investors, including Carl Icahn, to slash debt and to raise cash immediately.  Chesapeake faces huge operating cash deficits as it continues to invest in oil drilling and exploration in response to ultra-low natural gas prices. 

Chesapeake hopes to raise $11.7 by the end of the third quarter and a total of $13 to $14 billion through 2012 by selling its assets, notably some of its lush land in Texas’ Permian Basin.

Petroleo Brasileiro (NYSE: PBR), or Petrobras, is in a similar situation as Chesapeake.  Petrobras is not facing the cash problems that Chesapeake is facing, but the company is attempting to raise $14.8 billion to fund the company’s five-year investment plan.  The company raised that amount from a previous estimate of $13.5 billion.

Asset Sales

To accomplish the cash-raising feat, Petrobras is seeking a joint venture partner.  Often companies will seek out partners for new ventures in an effort to minimize their risk – if the investment goes bust they only lose their stake in the investment.  Petrobras, however, is stealing a play out of venture capitalists’ playbooks by looking to use a joint venture deal to bring on a partner in order to create a liquidity event – to bring in cash.

Petrobras hopes to raise $4 billion, and still keep control of the investment, by selling up to half of its stake in its Gulf operations.  In order to transact the deal, Petrobras hired investment banking titan Morgan Stanley (NYSE: MS), which is second so far in 2012 in number of deals transacted across the globe. 

Morgan Stanley has already begun the sale process by submitting financial information to prospects, and the Wall Street bank is using its network of relationships to target oil companies both in the United States and abroad.  Morgan Stanley has transacted 170 deals through the first half of 2012, compared to 190 for top-ranked Goldman Sachs and 138 for third-ranked JPMorgan Chase.

Focus on Brazil

Petrobras has been focusing its attention in an area of Brazil called the Lower Tertiary.  In the Lower Tertiary, Petrobras negotiated a joint venture with French oil producer Total (NYSE: TOT), giving Total a 33% stake in the deal.  Petrobras and Total took control of a development known as the Cascade-Chinook development, which was the first development in the Gulf of Mexico to “pump offshore oil using a floating, production, storage and offloading vessel instead of a traditional oil platform,” according to The Wall Street Journal.  Total and Petrobras made headlines for this move because it allowed the firms to extract oil from the bottom of the ocean without using pipelines.  The move is significant – if a storm comes, the ships can simply move out of harm’s way instead of being locked into place.

However, other companies are also focusing on this region. Chevron (NYSE: CVX) is also a major player in the Lower Tertiary.  Chevron operates about 160 miles south of Louisiana and drills in waters more than 8,000 feet deep.  The drilling has paid off, as the area has doubled monthly oil production from March through June – removing more than 174,000 barrels in June.

In all, Petrobras’ joint venture – despite facing Chevron’s competition – has borne much fruit.  The venture has allowed the firm to develop rich assets in lush areas that can be sold in order to raise cash.

Like Chesapeake, Petrobras holds a number of excellent oil assets.  But unlike Chesapeake, it wants to keep some grip on them in order to milk out some of the profits from its exploration and development work.  The two companies are using two different ways to go about raising cash, but I admire Petrobras' ability to keep some of the equity in case the plays explode in value.

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