(BJ) A relevant shareholder of 3R Petroleum is proposing a carveout of the company’s onshore oil fields and the incorporation of these assets by PetroReconcavo, in a transaction that shows the struggle of junior oils for scale, sources familiar with the matter told Brazil Journal.
The rationale for the transaction is already known to the market: 3R and PetroReconcavo have neighboring fields in Bahia and Rio Grande do Norte that previously belonged to Petrobras and were operated together. Bringing them back together under the same umbrella would generate US$1.1 billion in operational synergies between the assets, according to the terms of the proposal.
The transaction is being proposed by Maha Energy, the oil company listed on the Stockholm Stock Exchange that counts Starboard as its largest shareholder.
Maha has bought more than 5% of 3R shares in recent months. The company already owned 15% of 3R Offshore, the 3R subsidiary that brings together the Papa-Terra and Peroá fields, which are offshore.
If the transaction is consummated, 3R will continue to be listed on the Stock Exchange, but would only remain the owner of offshore fields.
In a letter sent to the boards of 3R and PetroReconcavo, Maha is proposing that PetroReconcavo incorporate 3R’s onshore assets, and is valuing these assets at the same value as PetroReconcavo on the stock exchange.
Thus, the 3R shareholder would gain one share of PetroRecôncavo for every share they have today, and would still remain a shareholder of 3R.
Maha’s proposal is that PetroReconcavo’s current management continues to lead the operation.
The transaction would create a company with 600 million barrels of 2P reserves, a market cap of around R$12 billion, a production of 70 thousand barrels/day — a number that should rise to 100 thousand in two years — and a verticalized operation.
For comparison purposes, Prio (formerly PetroRio), has 800 million barrels in reserves, produces 100 thousand barrels/day, is worth R$40 billion and trades at a relevant premium in relation to 3R and Petroreconcavo, with a multiple of 12x 2P reserves.
The transaction also transfers US$1.4 billion in debt from 3R to PetroReconcavo, whose balance sheet is much less leveraged and which would, after the transaction, have a leverage of just 1.4x EBITDA.
Maha calculated the exchange ratio between assets as follows.
3R has 410 million barrels of reserves; applying an EV/2P reserves multiple of 6.6x, this would give an enterprise value of US$2.7 billion. Excluding the US$1.4 billion of debt that 3R has, the equity value of the assets would be around US$1.3 billion.
PetroReconcavo is also worth US$1.3 billion on the stock exchange, as it has reserves of 194 million barrels and trades at a multiple of 7.1x. (The company today has just $119 million in net debt.)
Maha said in the letter that it estimates synergies between the assets at around $1.1 billion.
“It has a very large synergy of reducing SG&A and operating costs and reducing capex,” a person involved in the transaction told Brazil Journal. “As the two fields are neighbors, you don’t need two maintenance managers, for example. When drilling a well or carrying out an intervention, you can also make more optimized use of the probes.”
The two companies have also recently suffered from rising costs in the sector, with suppliers increasing prices due to the rise in oil prices.
“With a more robust structure, they will be able to negotiate better with these suppliers,” said this source.
For PetroReconcavo there is another additional benefit. The company has suffered in recent years due to its dependence on 3R’s flow infrastructure, which forced it to sell Brent at a discount.
3R owns a terminal, a refinery and a processing unit. In addition to the onshore fields, the transaction foresees that all this infrastructure will also be transferred to PetroReconcavo.
In the letter, Maha says that the assets of 3R and PetroReconcavo combined should trade at a premium compared to their peers, and lists some reasons.
Because they are in the Northeast, for example, the fields are eligible for the SUDENE tax benefit, which reduces taxes by 75%. Another advantage is that royalties paid to municipalities are around 10%, a low level when compared to other companies in the sector.
According to Maha, the combination of assets will also allow a significant reduction in lifting costs and an improvement in oil sales prices — which would also justify a premium on the share.
Maha calculates that the company could increase its market value by US$1.4 billion due to the expansion of its multiple, considering that it starts trading at 8.8x 2P reserves, compared to 7x today.
The transaction marks Starboard’s return to 3R, after the manager created the company with the combination of two of its assets and took it to the stock exchange in 2020.
Two years later, Starboard zeroed its position in the company.
In addition to Maha, another large shareholder of 3R is Gerval, the Gerdau family office, which has around 8% of the capital.
A source involved in the transaction said the proposal should be well received among the two companies’ main shareholders, who have already held informal discussions on the matter.
In the letter, Maha says that the idea is for 3R to send the offer to PetroReconcavo by February 28 and for the transaction to be completed in the second quarter.
Brazil Energy Insight 
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