Rio de Janeiro, 23 September 2010

Brazilian state oil giant Petrobras will likely see strong demand for its $79 billion share offer that prices late on Thursday as its access to massive crude reserves is offsetting investor concerns of growing government control over the company.

The offering will help Petrobras bring in fresh funds for the world's largest oil exploration plan and end months of uncertainty over the complex operation that has pushed its share price down 27 percent this year -- wiping more than $70 billion off its market value in the process.

Petrobras last week expanded the offer, a sign investors are finally coming to terms with a $42.5 billion oil-for-shares swap with the government that many saw as unfair to Petrobras' private shareholders.

"The offer is going to go well. People realize this is a good asset at a discounted price," said Marc Fogassa, a managing partner at Hedgefort Capital Management in Pasadena, California, which owns Petrobras shares.

"These oil reserves are considerably better than what companies here in the U.S. can offer."

The company earlier this month filed to sell 1.59 billion new preferred shares and 2.17 billion new common shares -- figures that do not include the greenshoe option. At Tuesday's closing prices, the sale of those shares could fetch 107 billion reais ($62.5 billion).

It then doubled the "greenshoe" option, which allows for the sale of additional shares in the event of extraordinary demand, to an extra 20 percent -- up from 10 percent.

"Apparently the demand is strong, because the market appears to be expecting a big jump in the shares," said Andre Querne, managing partner at hedge fund Rio Gestao de Recursos, which handles 140 million reais ($82 million) of stocks.

WORLD RECORD OFFERING

The massive offer will easily top Agricultural Bank of China's $22.1 billion initial public offering earlier this year, as well as the $36.8 billion share sale by Japanese telecommunications company NTT in 1987.

The Petrobras offer, and a planned overhaul of Brazil's oil legislation to give the government greater control over the country's vast new reserves, are high on the political agenda as Brazilians prepare to vote for a new president on Oct. 3.

The hugely popular President Luiz Inacio Lula da Silva, who leaves office on Jan. 1, has personally campaigned in favor of the offering with an eye on capitalizing Petrobras, whose growing stature is a source of pride for many Brazilians.

"All of my political life they've been calling me a socialist, and now I'm going to do the biggest capitalization that the capitalist world has ever seen," Lula said during a speech on Tuesday.

Lula's chosen successor, Dilma Rousseff, also favors a larger state role over strategic assets such as oil and is a big backer of the Petrobras share offering.

Polls show Rousseff with a good chance of winning the election in a landslide. The offering could prove attractive to foreign investors such as sovereign wealth funds that are seeking greater access to crude reserves.

Over the past decade, state energy companies have come to control a greater share of the world's oil as reserves held by private firms have dwindled.

The recent uptick in sentiment follows weeks of furious criticism of the transaction, which suffered a two-month delay and included weeks of tense negotiations between the government and the company over the price of oil to be used in the exchange for stock.

Analysts said the price of $8.51 per barrel that Petrobras ultimately agreed to was too high and therefore dilutive of shares. They had said a price of $5 to $6 per barrel would have been fair.

That raised concerns over increased state sway in the firm, possibly upsetting a delicate balance between state needs and investor interests that over the last decade turned Petrobras into one of the world's most respected state-run oil companies.

The government, which holds the majority of voting capital, has said it expects to boost its share in the company's total capital to 40 percent from 32 percent currently.

Its record size is seen as a boon for underwriters, which will be led by Brazil's Banco Bradesco in coordination with Bank of America Merrill Lynch , Citigroup , Itau Unibanco , Morgan Stanley , and Banco Santander Brasil.

BTG Pactual owned by Brazilian billionaire Andre Esteves, and state-owned Banco do Brasil will co-manage the offer.

Ends --

By Brian Ellsworth, Reuters - for Commodities Now