A Laggard in Brazil Oil Frenzy Is Now a Favorite in the Bust

• QGEP’s 2011 IPO earned less investor interest than OGX, HRT
• Now, analysts say it’s best bet among Brazilian oil producers

By Peter Millard and Denyse Godoy
(Bloomberg) --

In the saga of Brazil’s oil industry, QGEP Participacoes SA has always flown mostly under investors’ radar. It’s no heavyweight like state-run Petrobras, nor has it ever been as flashy as OGX, ex-billionaire Eike Batista’s startup. But among producers that sold more than $77 billion in stock after Brazil discovered massive offshore crude deposits in 2007, QGEP now stands out: It has the best track record of meeting its output targets almost a decade later.

That hasn’t stopped investors from dumping the stock along with its peers. QGEP is down more than 80 percent since its 2011 peak as oil prices collapsed, OGX filed for bankruptcy protection and Petrobras was ensnared in a crushing corruption probe. QGEP Chief Executive Officer Lincoln Guardado says it’s time for investors to take a second look. And analysts agree. “Brazil will return as a global hot spot,” said Guardado, a geologist and former Petrobras executive. And when it does, analysts from Grupo BTG Pactual to Itau BBA say QGEP will be investors’ best bet.

The company is a favorite among local stock pickers, with nine out of 11 analysts recommending that clients add it to their portfolios. BTG analystAntonio Junqueira said QGEP is the “only buy” in his coverage universe of Brazil oil and gas producers.
‘Balanced Risk Taking’. “After so much frustration in recent years, Brazil’s energy sector seemed all but over,” said Marcos Peixoto, the head of XP Investimentos’s asset management unit who’s analyzing whether to buy the stock. “QGEP stands out because it’s more conservative than the other producers.”

Guardado said the company’s strategy is best described not so much as conservative as “balanced risk taking.”
“We distribute risk” by partnering with bigger players, Guardado said in an interview at the company’s offices, which occupy a few floors in a downtown Rio de Janeiro building that looks modest in comparison to OGX’s old art-deco headquarters several blocks away. “It’s not our practice to maintain 100 percent stakes anywhere.”

Back in 2011, when QGEP sold shares in an initial public offering, that strategyhardly made it a darling among investors. The company eventually raised about $890 million after cutting its offering price by 34 percent below the top end of its target range.
The previous year, Petrobras, whose full name is Petroleo Brasileiro SA, had raised $70 billion in what was then the world’s biggest-ever stock sale. Oil startup HRT got almost $2 billion in its IPO and a follow-up sale a few months later as it bet big on far-flung oil blocks in Africa and what it said were “super giant” Amazon oil fields. And OGX raised more than $4 billion in 2008 with promises of becoming Brazil’s top driller. The company never came close.

Output Misses
OGX has since changed its name to Oleo & Gas Participacoes SA, or OGPar, and is still in talks with creditors to restructure debt. HRT, too, has a new moniker -- Petro Rio SA -- after striking out back-to-back at 14 wells between 2009 and 2013. And Petrobras is selling assets -- including part of its stake in the Carcara field, in which QGEP holds a stake -- after missing production targets and slashing investments as it struggles under the global oil industry’s heaviest debt load.

That’s not to say QGEP also hasn’t had output setbacks. Guardado says the soonest it will start up output at its Atlanta field more than 100 miles off the coast of Rio de Janeiro is late this year. But it’s also consistently met or beat its targets at its Manati natural gas field, whose revenue finances the company’s operations and oil investments, QGEP says on its website.
“Everyone has their own strategy,” Guardado said. “Those other companies were very bold. And, unfortunately, in our opinion, it didn’t pay off.”

--With assistance from Julia Leite.

To contact the reporters on this story:
Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net;
Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net
To contact the editors responsible for this story:
Brendan Walsh at bwalsh8@bloomberg.net;
David Marino at dmarino4@bloomberg.net
Jessica Brice
Antonio Junqueira (Banco BTG Pactual SA)
Lincoln Guardado (QGEP Participacoes SA)
Marcos Peixoto (XP Investimentos CCTVM SA)

Updated in  2016-06-17T11:08:52
All the dates of this page are presented in official timezone of Brasilia - Brazil.


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