Another Chinese Surge into Brazil

As you know, the deepwater Gulf of Mexico has been shut down until late November by an Obama administration-ordered moratorium following the April BP (NYSE: BP  ) explosion and oil spill. Indeed, even some of the shallower areas of the Gulf have been hit by the chaos.

Despite the Brazilian government's pressure to become a bigger part of the nation's oil picture, including its state-owned oil company Petrobras (NYSE: PBR  ) , it's hard to miss the progressively increasing attention the area is gaining worldwide. The latest wrinkle from the biggest South American country is the possibility of China's CNOOC (NYSE: CEO  ) jointly bidding a rumored minimum $5 billion to $7 billion with China Petrochemical Corp. (aka Sinopec) for something approaching a 30% stake in OGX Petroleo & Gas Participacoes, SA.

OGX is based in Rio de Janeiro, and has found oil discovery success during the past few months in the 29 blocks in which it is active, mostly in the shallow water. In the meantime, given the possibility of a deal, OGX has transferred its Campos Basin assets to a separate company. It appears that any potential deal could include a combination of asset sales, along with an equity component.

At the same time, while China appears to be in the lead for any potential Brazilian sale, those who have been watching the potential sale develop also list ExxonMobil (NYSE: XOM  ) , along with Chevron (NYSE: CVX  ) and Statoil (NYSE: STO  ) , as potential buyers. China has already become the largest investor in Brazil, and not solely for energy.

The rapidly developing Asian country -- which has become the world's second-largest economy -- also has tapped Brazil's plethora of natural resources for iron ore mines and farmland. But that's hardly the extent of China's resource blitz. Last year Sinopec paid about $8 billion for Addax Petroleum Corp. Earlier this year it came away with a $3 billion, or 40%, stake in Peregrino, a Brazilian offshore field that was then 100% owned by Statoil.

OGX has about 3.69 billion barrels of potential reserves in seven of its Campos Basin blocks, according to certification last year by DeGoylyer & MacNaughton. Discoveries this year almost certainly have added to that total.

All in all, given CNOOC's active movement around the world, I'd urge Fools to keep an eye on the peripatetic Chinese company. At the same time, it's difficult to counsel investors to ignore ExxonMobil for its quality management and its own geographic spread.

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. CNOOC is a Motley Fool Global Gains pick. Chevron, Petroleo Brasileiro, and Statoil ASA are Motley Fool Income Investor choices. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 14, 2010, at 6:36 AM, FiveHappyDaze wrote:

    The uprising of BRICs is changing the structure of the world and driving the global economy. Members of BRICs are earnestly practicing the style of international relations they have advocated, setting an example of friendly cooperation between different cultures. China and Russia, China and India, China and Brazil as well as Russia and India have all established strategic partnerships. Russia is rich in energy and mineral resources, and Brazil has natural and alternative energy technology. Both China and India are manufacturing giants, and the relationship between Russia and India will doubtlessly be complementary economically.EMBI+ (Emerging Markets Bond Index Plus) risk rating for Brazil has reached another low record of 170 b.p in 03/2007. This reflects the building of confidence by foreign investors in the Brazilian economic policy, that once again gave proof of reliability by paying IMFs $15.5 billion debt in advance and raising a $110 billion reserve.

    The five key themes that we believe will shape the performance of Brazilian market equities over the medium term are:

    1. Integration of emerging market labor into the global economy, with rapid growth in working-age populations and average incomes, leading to the development of large urban consumer markets. In fact, in our view, enhanced emerging market labor supply into the global economy is the most important determinant of the current global boom - much more important than demand side factors, such as home-equity withdrawal in the US or easy money policy from the Fed.

    2. A continued boom in infrastructure construction and energy demand in the emerging world and, hence, further gains in commodity prices relative to manufactured goods prices over the cycle.

    3. Further reductions in external debt burdens and the trend of real exchange rate appreciation over the cycle, versus developed country peers.

    4. Increased household and corporate sector leverage, and the development of capital markets including mortgage markets, pension systems and liquid local currency yield curves.

    5. Further global industrial and services sector consolidation, characterized by emerging market companies playing an enhanced role in industry leadership.

    There is clearly still some space for profiting with Brazilian securities, comparing P/E to that of other countries. We continue to be believe in a 2007 re-acceleration in global growth. Main risks to our benign scenario for equities include the potential escalation of geopolitical tensions, a collapse of the USD, a sharp rise in US treasury yields and sudden widening of corporate debt spreads.

    ----------------------------------

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