RIO DE JANEIRO—The Brazilian unit of French oil and natural gas company Perenco faces a tough sell as it seeks to raise up to $511 million from an initial public offering on the São Paulo stock exchange.
The financial problems facing several European nations and fears of sluggish global economic growth have made investors wary of stocks, and they are shunning emerging-market assets in particular, as they seek relatively safe assets on heightened expectations of a disorderly Greek debt default.
"The moment doesn't appear to be ideal," João Pedro Brugger, who manages $100 million in debt and equities for the Leme Investment Fund, said about Perenco's plans. "The market is very volatile and aversion to risk is growing." He said he will likely pass on the IPO.
Perenco last week announced it is offering 408,568 common shares in Perenco Petróleo e Gás do Brasil Participações SA between 1,550 Brazilian reais and 2,000 reais ($931.50 and $1,242.00) a share. That would raise between 633 million reais and 817 million reais for the company, which is targeting a July 5 stock-market debut. It will use the cash to fund further exploration in the five offshore Espirito Santos Basin blocks that it operates in partnership with OGX Petróleo e Gás Participações SA.
Perenco's deal will also likely determine the success of another IPO, planned by PetroRecôncavo for later this year. PetroReconcavo was created in 1999 and produces oil and natural gas from onshore fields in the northern Brazil state of Bahia.
But unlike PetroRecôncavo, Perenco doesn't yet produce oil or natural gas. That means investors are betting on a future payoff should Perenco´s exploration turn up commercial volumes of offshore oil.
Perenco is reminiscent of Karoon Gas Australia Ltd., which sought to go public in November. Karoon also is considered a pure exploration play because it doesn´t yet have any production assets in Brazil. Karoon owns rights to five blocks offshore Brazil, as well as a 20% stake in two offshore blocks operated by Brazilian state-run oil company Petroleo Brasileiro, or Petrobras.
Karoon canceled plans to raise about $773 million from the IPO of its Brazilian unit, citing a downturn in interest in the Brazilian oil and gas market..
This year started off brighter, with many expecting a banner year for stock issues. The market soured, however, on social and political upheavals in North Africa and the Mideast, while the earthquake and tsunami in Japan sidelined a key contingent of foreign investors. Brazil's Ibovespa stock index has skidded nearly 13% this year.
Some companies have pressed on with share offerings, but they had to sell shares for less than they had expected. In March, QGEP Participações SA, the oil and natural-gas arm of local engineering and construction firm Queiroz Galvao, raised 1.5 billion reais in an IPO. Despite already producing natural gas from the offshore Manati field, the company was forced to sell shares at 19 reais, below the original estimate of 23 reais to 29 reais.
The recent struggles by smaller oil sector players are a long way from the halcyon days of 2008, when billionaire Brazilian businessman Eike Batista's OGX Petróleo e Gás Participações SA raised a then-record 6.7 billion reais before it had produced a barrel of oil. Just last year, Petróleo Brasileiro SA launched the world's largest-ever share sale with its $70 billion follow-on offer.
Investors buying shares in oil and natural gas explorers, especially those that have yet to drill any wells, assume a great deal of risk. But that can pay off handsomely should the company find commercial volumes of oil and see them through to production.
Leme's Mr. Brugger said Perenco has a good chance of success with its IPO if it targets deep-pocketed institutional investors looking for a cheap entry into Brazil's offshore oil frontier, he said.
Perenco's five blocks could hold 645 million barrels of oil, according to preliminary estimates made by DeGolyer & MacNaughton, a consulting firm. The company may also seek to buy up more blocks, with Brazil preparing to offer fresh concessions later this year.
—Rogerio Jelmayer in São Paulo contributed to this article.
Write to Jeff Fick at jeff.fick@dowjones.com
stock market debut, brazilian reais, perenco, market assets, santos basin, global economic growth, initial public offering, commercial volumes, northern brazil, brazilian unit, debt default, australia ltd, french oil, brugger, tough sell, offshore oil, rio de janeiro, emerging market, investment fund, karoon gas
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