Investors fishing for next big Brazil startups

Private equity: Feeling out new companies in advance of upcoming bid round

Brazil’s plan to sell offshore oil licenses for the first time in six years is sending private- equity investors on a search for startups to compete with global producers including Shell and BP, according to a report.

Denham Capital Management, the Boston-based energy investor overseeing $7.3 billion, is among funds in talks with startups before a government auction, Victor Munoz, Denham’s head for Latin America, told Bloomberg.

Ouro Preto Oleo & Gas, a Brazilian explorer financed by Rio de Janeiro-based fund Turim, is seeking to attract investors, Dirceu Abrahao, the startup’s ventures director, told the news wire.

Agua Grande Petroleo, backed by Toronto-based Forbes & Manhattan, is also looking for additional private funding, chief executive Officer Peter Boot said.

"We're exploring opportunities," Munoz said in an interview with the news wire from Sao Paulo. "The life of an exploration company is access to more concessions."

President Dilma Rousseff's plan to auction 172 blocks in May means producers can expand in Brazilian waters, six years after the world's largest oil discoveries since 2000 were made in a region that may hold more than 50 billion barrels of oil.

The sale will attract private equity-backed ventures looking to replicate the success of Barra Energia Petroleo & Gas, the oil startup that owns 10% of one of the country's biggest fields, KPMG adviser Manuel Fernandes said.

"The sources of capital would come from these private- equity funds, and folks that are looking for some opportunities to maximize returns, like Ouro Preto," Fernandes, head of oil and gas at the advisory and auditing firm in Rio, said by phone.

"I see more space for these newcomers."

Brazil has repeatedly postponed the sale of exploration areas since state-run producer Petrobras discovered the giant offshore Lula field in a region known as the pre-salt, leaving ExxonMobil and other producers shut out of an area that holds at least $5 trillion of oil.

The lack of bidding opportunities since 2008 created pent- up demand from both small companies and major oil producers looking to buy areas that haven't been explored, said Wagner Freire, who helped set up Rio-based Agua Grande in 2011 and is a former exploration and production director at Petrobras.

Buying into existing projects normally costs more because sellers have already invested in exploration, he said.

Ouro Preto is searching for funding from private-equity investors in Brazil and abroad, Abrahao said in an interview from Rio.

Agua Grande is also considering partnering with established oil companies for the auction, said its chief executive, also speaking from Rio.

"The oil game is a game where you're always willing to have partners -- you don't play it alone," Boot said.

US-based First Reserve Corp. and Riverstone Holdings contributed $1 billion to fund Barra, which acquired Brazilian tracts in 2010, including an offshore stake in the Carcara area that it bought from Shell.

Petrobras, which operates the block in the Santos Basin, said in August it found good-quality oil at Carcara thicker than the layer at Lula, Brazil's largest field with an estimated 6.5 billion barrels of reserves.

"Other investment funds will probably follow the same model," Clovis Meurer, head of the Brazilian Private Equity & Venture Capital Association, said in an interview from Porto Alegre, Brazil.

"Sovereign funds could be looking for big oil and gas projects."

While the auction, known as Round 11, won't include any pre-salt areas, it will offer blocks along Brazil's equatorial margin where the geology mirrors recent discoveries near the coast of Africa.

Petrobras has found high-quality oil in the Ceara and Sergipe basins where new blocks will be offered in the bid round. OGX has found commercial volumes of natural gas in the on-shore Parnaiba basin, also near acreage up for sale.

"The equatorial margin is one of the exploration hot spots globally right now," Ruaraidh Montgomery, a senior analyst at oil and gas researcher Wood Mackenzie, said by phone from Houston. "There's huge attention now on the South American side."

The high cost and risk of dry holes in areas with no proven reserves may discourage some private-equity investors, said Montgomery, who expects most of the bidders to be majors including Exxon and Shell, as well as small exploration companies including Tullow Oil and Brazilian explorers that already have acreage elsewhere.

"My guess is this will predominantly be a round for the big boys," Montgomery said. "It’s still very much frontier areas. There will still be a time lag between discovery and first oil."

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