Brazil is on the verge of an energyboom. Recent major oil & gasdiscoveries in offshore deepwater‘pre-salt’ fields will move thecountry into the top five producersglobally by 2020.

The resumption of explorationauctions in 2013 will boost M&Aactivity as international corporatesacross the supply chain positionthemselves to benefit from theassociated investment.

Key findings from our research

State-owned Petrobras is investingUS$225 billion in energy projects tomeet its goal of doubling oil productionby 2020. Local industry will be a majorbeneficiary of this investment due togovernment regulation regarding localcontent (see page 5). However,Petrobras also needs the expertise ofinternational corporates. This is creatinghigh value opportunities for foreigncorporates across the supply chain.

Three new auction rounds will takeplace during 2013 covering 289exploration blocks, pre-salt and shalegas. They will be a catalyst for M&Aand new investment as local andinternational energy & productioncompanies look to add reserves andsuppliers position themselves to wina share of the spend.

Some international companies in thesupply chain have established a localpresence. However, many are using jointventures and acquisitions of domesticbusinesses to ensure they meet localsupplier content and gain the approvalsnecessary to supply to Petrobras.Petrobras is however cash constrainedand is looking for alternatives to fundinginvestments. Overseas investors areimportant in this regard.

Key major oil & gasfrontier for

internationalcorporates

“Brazil is transforming itselfinto one of the world’s mostimportant oil & gas markets.We are seeing both largecompanies and UK SMEsacross the supply chain usingdifferent M&A strategies toenter the market.”Keith Pickering, Partner, Catalyst Corporate Finance

Companies targeting US$400 billionopportunity

Oil & GasCountry M&A Update – Brazil

Summer 2013

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A major offshore oiland gas frontierBrazil is now the ninth largest oilproducing country, accounting foraround 25% of global output. Onethird of global reserves discovered inthe last five years were found in Brazil,including the major find in the offshoredeepwater “pre-salt” layers off theSouth East coast. By 2020, Brazil isaiming to be a top five global oilproducer.

The country has been self sufficient in oilsince 2006. Estimates that the pre-saltfields hold reserves of 20 billion barrels isleading to export forecasts of around1.5 million barrels of oil per day (bbl/d) by2020. This compares to 8.5 million bbl/dcurrently exported by Saudi Arabia.

Petrobras dominates energy production

State-backed Petrobras accounts foraround 90% of Brazil’s total oil & gasproduction. It benefits from regulatoryadvantages over other competitors.For example, the production sharingcontract regime (PSC) establishedunder the 2010 Pre-Salt Law requiresPetrobras to be the operator on allpre-salt oil fields and to hold a 30%stake in other non-exclusive fields.

Independent Brazilian oil & gascompanies including Cosan, QueirozGalvão and OGX are becomingestablished players.

Global oil & gas majors are committedto Brazil with around 40 internationalcompanies active in Brazil’s upstreammarket (see Figure 1).

US major Chevron holds workinginterests ranging from 30% to 52% infields with average daily production of71,000 barrels of crude oil and 28million cubic feet of natural gas.Chevron’s largest investment in Brazil isthe development of its 37.5% interest inthe subsea Papa-Terra field, located inthe key Campos Basin. Planned totaldaily capacity of 140,000 barrels ofcrude oil is expected in 2013 viaproduction using floating production,storage and offloading (FPSO) facilities.

BG, the largest UK investor in Brazil,has invested over US$5 billion since themid 1990s. It plans to invest a furtherUS$30 billion over the next decade.BG is a partner in four offshore blocksalongside Petrobas, Repsol, SinopecBrasil and Petrogal, with estimated totalreserves of six billion barrels of oilequivalent. BG has a majorityshareholding in Comgás, Brazil’s largestnatural gas distributor, and a stake inthe gas pipeline which runs betweenBrazil and Bolivia.

Hess

Gazprom

Statoil

ExxonMobil

Eni

Shell

Petrobras

BP

Total

Chevron

Others

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Floating liquefied natural gas

Floating production, storage and offloading

Semi-submersible platform

SPAR platform

Tension leg platform

Others

Note: Includes offshore projects in conceptualphase, FEED, under bidding or under construction

BG

Number of projects

Figure 1: Petrobras and selected global oil majors offshore projects

Source: Petrobras 2012, BG

Global majors aremaking a long-term

commitment to Brazil

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China is becoming a significant player.In 2009, China extended aUS$10 billion credit line to Petrobras todevelop offshore oil. Terms included anincrease in oil exports to China. Sinopecis now one of the sector’s largestinvestors. Both Sinopec and Sinochemare growing their market share viaacquisitions of assets in oil fields(see page 6).

The May 2013 Round 11 Auctions (289exploration blocks) and Pre-Salt andShale Gas bidding rounds later in theyear will increase the penetration offoreign majors and boost M&A. Thestrategies used to participate in biddingwill be affected by the different rulesgoverning each auction (concessionagreements, production sharingcontracts and the dominance ofPetrobras as the operator of all pre-saltblocks for example). Different rules willalso affect how the unitization processis conducted and therefore the valueof individual blocks.

Petrobras leading a massiveinvestment programme

Petrobras has the highest productiongrowth rate amongst the oil producersoperating in Brazil. To achieve this, itscurrent five year business plan is builtaround a US$225 billion investment

plan which includes US$127.5 billionin exploration and production (E&P)(see Figure 2). This investment willenable Petrobras to double its oilproduction for both domesticconsumption and exports to overfour million barrels per day by 2020.

Local producers and the global majorsare also making significant investmentsto develop E&P in strategically importantoil fields. Total investment in Brazil’s E&Psub-sector is forecast to reach US$400billion (including Petrobras’ expenditure)by 2020. Petrobras is however cashconstrained and is looking for alternativesto funding investments. Overseasinvestors are important in this regard.

The global outlook

Increasing demand for energyIn line with the increase in global economic growthestimates for 2013, forecasts for oil and gas consumptionare positive, mainly due to Chinese import demand. BP isforecasting oil consumption will grow by 1.6% a year,leading to 36% growth between 2011 and 2030. Morethan 90% of the growth is forecast to come fromnon-OECD countries.

High oil price supporting deepwater drillingThe stable high oil price has underpinned investment indeepwater drilling technology and made difficult recoveryenvironments economic. This has led to a significant shiftin the outlook for new reserves and the recovery potentialof previously difficult hydrocarbons – tight oil, shaleoil & gas and oil sands.

The world proven oil reserves total approximately 1,383 billion barrels of oil equivalent (BOE).The Middle East represents almost 54% of the total.

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Figure 2: US$224.7 billioninvestment by Petrobras

Source: Petrobras

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New auctions willboost activity byglobal majors

Opportunity Lead supplier Support supplier

Offshore oil drilling facilities needconstant supplies during and afterconstruction

Petrobras estimates it will need 235support vessels by 2020

Brazil’s Wilson Sons provides serviceswithin shipbuilding and shipping. It has aservice contract with Petrobras totransport supplies

Netherlands-based Damen Shipyards is building newtugs (in Brazil) and providing offshore supply vessels(OSV) to Wilson Sons. OSV engines include Caterpillargenerator sets that power Rolls Royce azimuththrusters

Equipment which goes on the seabed and enables production

Petrobras is constructing 48 drillingrigs and 38 oil production platforms

GE’s oil and gas business will supplyPetrobras with 380 subsea wellheadsystems valued at US$1.1 billion. Over75% of parts will be made in Brazil

UK subsea engineering specialist Viper Subsea wonan order with Petrobras through a first tier supplierto supply underwater components

UK-based Sonardyne International has a contract tosupply subsea acoustic positioning technology for useby Subsea 7 in pre-salt fields

Offshore drilling vessels

Petrobras needs over 30 newdrilling vessels

Singapore’s Sembcorp Marine’s wholly-owned Brazilian shipyard Estaleiro JurongAracruz secured a US$793 million contractfrom Guarapari Drilling BV, Netherlands, asubsidiary of Sete Brasil Participacões

Austria-based Palfinger Dreggen has a US$121 millioncontract to supply cranes to the Jurong Shipyard

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Oil & Gas - Brazil M&A update

Mid-marketcompanies usingtier 1 suppliers to

enter market

Long-termopportunities acrossthe supply chainA significant amount of infrastructureinvestment is needed to exploit Brazil’sdeepwater oil and gas reserves. Strict localcontent rules mean Brazilian companies areplaying a major role across the supply chain(see page 5). However, limited localexpertise, assets and capacity meansproduction targets will not be met withoutthe participation and technical expertiseof foreign operators.

Areas where Petrobras has highlightedit needs the expertise of foreigncorporates include:

Upstream opportunities related to E&Pincluding testing and drilling equipment,oil platforms and drilling components,installation of exploration equipmentand equipment maintenance.

Downstream opportunities include oil &gas transport, refinery, petrochemistryand maintenance/monitoring equipment.

Mid-market also seizing opportunities

For some mid-sized component and servicesuppliers, the most effective approach toenter the market is via first tier suppliers.Large Brazilian and international companieslike GE, Aker and Cameron are providingsupply chain opportunities. Petrobras wantsto develop standardisation in manycomponents and so supply contracts toboth Petrobras and tier 1 suppliers canbe substantial (see Spotlight below).

Spotlight: selected opportunities in the subsea E&P supply chain

Source: Catalyst Corporate Finance, company press releases

Servicing

Well construction

Drilling vessels

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“Our joint venture with GardlineMarine Sciences gives usaccess to expertise andoperating assets, and enablesus to share technology.”Flavio Andrade, Chief Executive Officer, OceanPact andGardline Marine Sciences do Brasil

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Oil & Gas - Brazil M&A update

Market entrystrategies influencedby local protectionmeasuresGovernment regulation influencesthe strategic options available tointernational companies targeting thesector. Most are entering the supplychain via joint ventures with, oracquisitions of, mid-sized domesticcompanies which ensure they canparticipate in Petrobras tenders andmeet Brazil’s local content policy.

Petrobras approved suppliers’ register

Companies awarded contracts andorders directly from Petrobras arechosen from the company’s SupplierApproval Register. Registration can behighly bureaucratic and slow andforeign companies are required to havea legal representative in Brazil to fulfilllegal and financial requirements.

Acquisitions and joint ventures areoften the easiest way to enter theregister. There are over 5,500companies on Petrobras’ supplierregister so significant M&Aopportunities exist.

For example, US well completion specialistFTS International formed a joint venturein 2012 with privately-owned BrazilianE&P PETRA Energia, which will providewell completion products and servicesfor conventional onshore andunconventional oil and gas wells in Brazil.

Local content regulations

Legislation enforced by financial penaltiesrequires goods and services used in theBrazilian oil & gas industry to have asignificant level of “local content”.

Joint ventures enable internationalcompanies to ensure that they meetregulations while often increasing thecompetitiveness of their locally-basedpartner with regard to price, deliveryschedule and quality requirements. Forexample, French oil service companyTechnip and Brazilian services providerOdebrecht agreed a joint venture whichwon a five-year contract estimated toworth US$1 billion to supply twopipeline installation ships to Petrobras.

Some companies are using acquisitionsto accelerate their entry into the sector.For example, UK-based Hydrasunacquired Remaq Ltda, a Brazil-basedprovider of flexible hose assemblies,in 2011 (see case study below).

Market entry case study: Hydrasun, UK-based provider of fluid control equipment

The strategic importance of BrazilHydrasun was attracted to the scale of investment beingmade to access deepwater reserves. Customer feedbackconfirmed that demand for Hydrasun’s products fromsubsea operators and drill equipment manufacturerswould be high.

Acquisition used to gain entryHydrasun decided that an acquisition would fast-trackits entry into Brazil and acquired Remaq, a local providerof flexible hose assemblies, in 2011. Remaq had acomplementary business model and a proven recordwith Petrobras, ensuring Hydrasun would meet local

content regulations and avoid Petrobras’ supplierapproval process.

Local acquisition enhanced value to acquirersEquistone Partners led a management buy-out ofHydrasun in 2007 which valued the business at aroundUS$115 million. Revenue has grown from US$75 millionin 2008 to US$157 million for financial year 2013.

The Investcorp Gulf Opportunity Fund acquired acontrolling stake in Hydrasun in February 2013 attractedby its presence in high growth markets including Braziland the Gulf Coast.

M&A and jointventures enable

corporates to meetstrict Brazilian

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Oil & Gas - Brazil M&A update

New auctions willdrive M&AThe size of the potential deepwateroil & gas reserves and the level ofinvestment by Petrobras and the globalmajors has driven M&A over the lastfive years.

The number of deals has fallen from apeak of 24 in 2010, a record year, to 15in 2012 (see figure 3). The fall was dueto uncertainty regarding the timing andterms of new exploration auctions, andconcerns about the scale of capitalexpenditure being undertaken byPetrobras and its impact on thecompany’s cashflow. However, the 2013bidding rounds will act as a catalyst forpartnerships and M&A as the majorsand leading suppliers look to expandtheir operations.

Inbound M&A is being driven by threemain types of international acquirers.

National oil companies

China has been one of the most activeacquirers. In 2011, Sinopec acquired a30% stake in the Brazilian assets ofGalp Energia, the Portuguese energycompany, for US$5.2 billion. Chemicalscompany Sinochem acquired a stakein the Peregrino Oil Field from Statoilin 2010.

Global majors and equipment providers

Oil majors are using acquisitionsto grow reserves. Maersk Oil’sUS$2.4 billion acquisition of SK doBrasil, owned by South Korea’s SKEnergy, gave the oil producer accessto three offshore oil blocks.

Trelleborg acquired a Braziliansubsidiary of Veyance TechnologiesInc which produces hoses for surfaceand deepwater applications in Brazil in2011 for US$6.3 million.

Tuscany International Drilling’sacquisition of Drillfor for US$62 millionin 2011 quadrupled the company’sBrazilian fleet, giving a 15% to 20%market share in the offshore drillingmarket. Contracts with Petrobrasand Petrogal were part of the saleconditions.

Private equity

Private Equity (PE) is increasing itsparticipation in projects. Both domesticenergy-focused and generalist fundsare investing. In 2011, BTG Pactualannounced a partnership withBrasbunker, a holding company thatcontrols companies in bunker transport,support for offshore platforms.

International PE is active and competingfor specialist operators. Singapore’sTemasek acquired a 14.3% stake in theoil services unit of Brazilian Odebrechtfor US$400 million.

Corporates will useM&A to meet

demands of newdeepwater projects

Domestic andinternational privateequity active in the

sector

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Marine Ports and ServicesEquipment and ServicesDrillingStorage and TransportationRefining and MarketingExploration and Production

Last auction round Record year for M&ALess activity by IOCsawaiting new auctionopportunities

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Figure 3: M&A in Brazil's Oil & Gas sector since 2010

Source: Capital IQ, Catalyst Corporate Finance

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Oil & Gas - Brazil M&A update

Feb-13 Georadar LevantamentosGeofisicos

Brazil Oil & gas equipmentand services

Modal Administradorade Recursos

Brazil 50.4 Private equity

Dec-12 Alvorada Petroleo Brazil Oil & gas explorationand production

Fortress Energy Canada 37.0 Inbound

Aug-12 Sete Brasil Brazil Oil & gas explorationand production

Petrobras andBTG Pactual

Brazil 2,709.9 Domestic,Private equity

May-12 WFS Sondagem Brazil Oil & gas equipmentand services

ForacoInternational

France 19.8 Inbound

May-12 Prooceano Brazil Environmental servicesfor oil and gas

Collecte France NA Inbound

Mar-12 Shell, BM-S-45 ExplorationBlock in the Santos Basin

Brazil Exploration block Petrobras Brazil NA Domestic

Feb-12 Petrogal Brazil Brazil Oil & gas explorationand production

Sinopec China 4,800.0 Inbound

Dec-11 Raízen, Aviation Fuel Assets Brazil Oil & gas storageand transportation

BP UK 100.0 Inbound

Dec-11 Alvorada Petroleo Brazil Oil & gas explorationand production

Fortress Energy Canada 37.7 Inbound

Nov-11 Remaq Ltda Brazil Provides flexible hoseassemblies

Hydrasun UK NA Inbound

Oct-11 Repsol Gas Brasil Brazil Oil & gas refiningand marketing

UltraparParticipacoes

Brazil 27.5 Domestic

Sep-11 Shell, Block BS-4 inSantos Basin

Brazil Exploration block Barra Energia Brazil 52.5 Domestic

Sep-11 Tropical BioEnergia Brazil Oil & gas refiningand marketing

BP UK 59.8 Inbound

Jul-11 SK do Brasil Brazil Oil & gas explorationand production

Mærsk Denmark 2,400.0 Inbound

May-11 Drillfor Brasil Brazil Oil and gas explorationand production

TuscanyInternational

Canada 52.0 Inbound

Apr-11 Veyance Technologies, PlantLocated in Santana de Parnaiba

Brazil Oil & gas equipmentproduction plant

Trelleborg Sweden 6.3 Inbound

Apr-11 Statoil, Peregrino Oil FieldIn Brazil

Brazil Oil field SinochemGroup

China 3,070.0 Inbound

Dec-10 Agua Grande Exploracao eProducao de Petroleo

Brazil Oil & gas explorationand production

BrookwaterVentures

Canada 4.3 Inbound

Oct-10 Odebrecht Óleo e Gás Brazil Oil & gas explorationand production

Temasek Singapore 400.0 Private equity

Oct-10 Repsol Brazil Oil & gas explorationand production

Sinopec China 7,175.3 Inbound

Sep-10 Brasbunker Brazil Oil & gas services BTG Pactual Brazil NA Private equity

Apr-10 Starfish Oil & Gas SA Brazil Oil & gas explorationand production

Sonangol Angola NA Inbound

Mar-10 Delba Maritima Navegacao Brazil Oil & gas equipmentand services

BOURBON France NA Inbound

Jan-10 CNEC Engenharia Brazil Engineering and projectmanagement services

WorleyParsons Australia 96.5 Inbound

Date Target company Country Target Activities Acquirer Country Deal value(US$ mm)

Deal Type

Figure 4: Selected M&A transactions

Source: Catalyst Corporate Finance, Captial IQ

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Our dedicated Brazil desk is staffed by professionals from Catalyst and our Mergers Alliance partner firm BroadSpan.We offer the following services:

Acquisition search assignments in Brazil

Advice on structuring and completing deals in Brazil

Information on sector trends and valuations

Access to corporate decision-makers and owners

Specialist advice on call...

Contact Keith Pickering,Partner, Catalyst Corporate Finance +44 (0) 20 7881 2960

Award-winning international corporate finance advice

Catalyst Corporate Finance LLP is a limited liability partnership registered in England & Wales (registered number OC306421)Registered Office: Bank House, 8 Cherry Street, Birmingham, B2 5ALCatalyst Corporate Finance LLP is authorised and regulated by the Financial Services Authority (number 478406)

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Company acquisitions

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Investment opportunities for privateequity firms

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This is all we do and all we want to do.

Catalyst’s focus is on advising management teams, private shareholders and corporates on:

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