Will Petrobras Go for the Galp Stake?

 |  Includes: GLPEF, PBR
by: Emerging Money

Even though Petrobras has more Brazilian oil than just about anyone can imagine, the company seems to want to grab more, even if it means diluting its already fragile capital structure a little further.

PBR (quote) is reportedly offering $4.7 billion to Eni (NYSE:E) (quote) for a 33% stake in Portugal’s Galp Energia (OTC:GLPEF) (quote)

As we mentioned when this was first proposed in the Brazilian business press, PBR is a company that has been dramatically underweighted by Latin mutual funds, but now seems to be playing out global ambitions. Buying into GLPEF adds scale and a toehold in Europe, both of which could be useful to the company strategically.

There is an undercurrent of positive technical signals — and even some good fundamentals — emerging for this name, but PBR needs to show us that it can sustain itself on internal cash flow without having to pump the capital markets for more.

Furthermore, PBR is likely to become a political vehicle for the new administration in Brasilia. It is hard to know how this will go down, but as Dilma installs her government the prospect does not look as scary as it might have with someone else running the country.

As it is, PBR rallied 12% in the last 10 days of 2010. If that can continue, Brazil may stop outperforming, as its biggest stock regains the leadership role it usually plays in the markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.