Private-Equity Firm EIG Doesn't Flinch From Brazil's Woes
5 days 22 hours 1 minutes ago - DJNF
By Marla Dickerson And Luciana Magalhaes
RIO DE JANEIRO--A Washington, D.C.-based private-equity firm is pouring investment into projects associated with two of Brazil's most tarnished names--state-run oil firm Petróleo Brasileiro SA and disgraced tycoon Eike Batista's former empire.
EIG Global Energy Partners has put nearly $2 billion into the country since the late 1990s and an estimated $780 million of that just in the last two years. Some of those investments involve key players in two scandals captivating the country--Petrobras's probe of alleged kickbacks in construction contracts and Mr. Batista's collapsed oil and logistics empire.
The troubles haven't changed EIG's view of Brazil. Chief Executive R. Blair Thomas says the country is poised to be a major exporter of oil--and EIG wants to be involved in making it happen.
"For the first time in its history, Brazil is going to be an exporter...and none of the infrastructure exists to make that happen," Mr. Thomas said in a recent interview here. "When...the opportunity was presented to us we couldn't think of a better thing to do."
With about $16 billion under management in dozens of energy ventures in 34 countries, EIG is accustomed to volatility. In recent months it has struck around $3.6 billion in deals, according to the firm. These include a $1 billion investment in bbep designed to help the Los Angeles-based oil-and-gas firm shore up its balance sheet and pursue acquisitions.
Its bets in Brazil are at a time many other investors have soured on the country and its dream of becoming a top-five oil producer by 2020. The same bargain-hunting strategy behind Breitburn led EIG in 2013 to snap up shares in the operator of the Açu Superport, a $2.4 billion port development begun by Mr. Batista.
EIG envisions Açu becoming a key shipping transfer point for petroleum extracted from deep-water fields located about 200 miles off Brazil's southeastern coast. EIG has forged ahead with new management, new construction and plans for it to play a crucial role in Brazil's energy future.
Still, with Petrobras mired in a deepening corruption scandal that has crippled the oil-and-gas giant amid plunging oil prices, EIG's gamble looks a lot riskier than it did just two years ago. Petrobras's market value and credit rating have plummeted, largely shutting it out of capital markets. Petrobras has scaled back its ambitious offshore plans, and the fallout has damaged Brazil's economy and threatens to engulf the government.
"Let's not sugar coat it, the current market environment is Brazil is bad," Mr. Thomas said.
In addition, another of EIG's Brazil investments has hit rough waters: a $270 million stake in Sete Brasil Participações SA.
Launched in 2010 to provide ultra-deep water drilling rigs to Petrobras, Sete was part of Brazil's strategy to use its new oil riches to bolster industrial development. Instead of importing drill ships from Asia, the government of then-President Luiz Inácio Lula da Silva was eager to create shipbuilding jobs at home. EIG joined a number of other private-sector financiers and Brazilian government-controlled institutions to fund the endeavor.
Now Sete has been ensnared in a massive graft scandal at Petrobras in which prosecutors accuse suppliers of skimming millions of dollars from Petrobras through inflated contracts. Sete's former chief operating officer, Pedro Barusco, has been charged with corruption and money laundering related to his previous role as an executive at Petrobras. As part of a plea bargain with prosecutors, he has admitted to taking bribes from shipyards in exchange for contracts with Sete.
Sete hasn't been charged with any crime. In an email to The Wall Street Journal, a spokeswoman for Sete said that an independent auditing firm hired by the firm to review its contracts concluded that all were "legal" and at "market prices."
Still, the revelations have paralyzed Sete and its hurt its suppliers, as Petrobras has canceled contracts and delayed payments. Ratings firm Standard & Poor's in late March downgraded Sete's rating to "selective default" status after it skipped a loan payment. EIG's Mr. Thomas is blunt in his characterization of what happened, and what needs to happen next.
"Executives and people that we dealt with defrauded us," he said. "So there has got be accountability."
As for Acu, the superport located about 250 miles north of Rio de Janeiro, Mr. Thomas said EIG spent the last 18 months plumbing its finances, renegotiating with creditors, replacing management and installing a fresh board of directors.
With funding from EIG, the port's owner, Prumo Logística Global SA, has continued building out the site, which is about 1.5 times the size of Manhattan. It is constructing a massive oil shipping transfer facility, the first of its kind in Brazil, that will allow drill ships to unload as many as 1 million barrels of crude to transport vessels in as little as 36 hours.
In a joint venture with mining giant Anglo American PLC, Prumo constructed an iron ore terminal that shipped its first load to China in October. Prumo is looking to handle other commodities too, including coal and bauxite, as well as some cargo.
A handful of oil and gas firms have already leased space at the port, including Houston-based National Oilwell Varco Inc., a provider of drilling equipment, and Edison Chouest Offshore, a Louisiana-based marine transportation firm.
Attracting more tenants in the short run won't easy, Mr. Thomas said, but "we are not looking at what is going to happen in the next 12 or 24 months. You have to go in with a long view."