Suppose there is a 10 percent chance that the Argentinian government will nationalize the project before the first year's cash flows arrive, and a 10 percent chance it will do so every year after that (if it was not nationalized previously). Petrobras will get nothing if the project is nationalized. Your boss tells you that instead of haircutting cash flows to get the new NPV, she wants you to come up with a risk premium that you will add to the WACC arrived at in (3) to discount the original cash flows in (5). What should that risk premium be?

Reference:

3) Assuming a tax rate of 35%, what is the WACC the ADR holder should use to discount Pecom's cash flows?

5) Assume the discount rate is what you calculated in (3). Project Pecom's free cash flows using exhibits 12, 13, and 14. Do not neglect the extraordinary FX losses. Project a terminal value, explaining how you arrived at the terminal value growth rate. Discount the cash flows and arrive at an enterprise value.

Case:

Drilling South: Petrobras Evaluates Pecom

If you live in our neighborhood, you've got to look at Argentina. It's going through a major crisis today, but it is the second largest market in South America.1

? Francisco Gros, CEO, Petrobras

Joo Nogueira Batista, Chief Financial Officer of the Brazilian firm Petrobras, reflected on Gros's words as he prepared for a Board of Directors meeting in July 2002. The main item on the Board's agenda was the proposed acquisition of an Argentinean firm, the Perez Companc Group, or Pecom.2The acquisition would significantly increase Petrobras's oil and gas production and add to its oil reserves. It would also provide the mainly Brazilian-based Petrobras with considerable foreign interests. Petrobras would have access to Pecom's management team, which had worked in most of the major Latin American countries and under different operating environments, enhancing Petrobras's ability to manage an international portfolio.

Recent corporate governance changes meant that Petrobras now had more independence from the Brazilian government, and some managers were eager to explore new opportunities for the company, including the possible acquisition of Pecom. Others were more cautious. General elections would be held in a few months, and one of the leading candidates for president, Luiz Incio Lula da Silva of the Workers' Party, did not fully support Petrobras's increasing autonomy. If Lula won the election, Petrobras's new structure and its strategy could be challenged. At the same time, the acquisition of Pecom would give Petrobras's even more weight and could increase the company's already substantial contribution to the Brazilian economy.

Batista had spent the previous weeks debating the merits of the acquisition and how to value Pecom with his team. There had been numerous discussions on the cost of capital for the acquisition, and especially on how to incorporate country risk given the current economic upheaval in Argentina. Uncertainty over the appropriate discount rate to use in a cash flow model led some team members to advocate other approaches to the valuation, such as multiples. It was Batista's responsibility to present these different perspectives to the Board. The uncertainties inherent in valuing Pecom were bound to give rise to interesting discussions at the forthcoming Board meeting.

Petrobras

Petrobras was created as a symbol of Brazil's natural wealth under the slogan "the oil is ours," in 1953. It was incorporated as a mixed-capital company3with a government-granted monopoly for all crude oil and gas production, refining and distribution in Brazil. Petrobras's official monopoly ended in January 2002, when the Brazilian government deregulated domestic prices for crude oil and oil products.

Petrobras's first discoveries were made onshore in the Northeast of Brazil in the 1950s and 1960s. In the mid 1980s, when the giant deepwater pools in the Campos Basin were discovered and developed, the profile of the company started to shift upstream toward exploration, development, and production.

Upstream and Downstream Activities4

By 2001, almost 50 years after its inception, Petrobras had become a fully integrated oil and gas company. Petrobras was the seventh largest publicly traded oil and gas company in the world based upon proven reserves, the largest Brazilian corporation, the third largest Latin American corporation, and the 185thlargest global company, by 2001 consolidated revenues.

In Brazil, Petrobras had a dominant position in both upstream and downstream activities. The company's combined oil and gas production was 1,621 tbpd and it had proven reserves estimated at around 9.3 billion boe.5(Exhibit 1provides selected oil and gas data for Petrobras and other oil companies.) Most of the firm's proven reserves were located in very deep waters (more than 400 meters) and Petrobras was the world's pioneer in deep water oil exploration and production. Furthermore, with approximately 60% of its reserves undeveloped, Petrobras had a large pool of assets to engender long-term production growth.

In downstream activities, Petrobras was the fifth-largest refiner in the world among traded companies, with a virtual monopoly in the Brazilian downstream business. It owned and operated 11 out of 13 refineries in Brazil, accounting for 98.6% of the Brazilian refining capacity. Petrobras also owned the largest oil distribution company in Brazil.Exhibits 2 and 3show the organization of the firm's main activities within its corporate and management structures.

The Restructuring of Petrobras6

Until the late 1990s, the Brazilian government owned 84% of the voting shares of Petrobras and the Brazilian President appointed the company's Board and its executive directors. For many years, there was a market perception that several governments had used Petrobras as a tool to contain inflation7or to advance development policies for specific industrial groups. Beginning in 1997, Petrobras became more independent of the government. Responsibility for appointing the Board shifted from the Brazilian president to Petrobras's shareholders, and the government was allowed to sell up to 34% of its voting shares in the capital markets. The government lifted restrictions on the ownership of shares by non-government entities and permitted foreign ownership of shares (seeExhibit 4for major changes in the ownership and governance of Petrobras). In August 2000, Petrobras was listed on the NYSE through an ADR Level II program, and in July 2002 it was listed on Latibex, the euro market for Latin American equity shares.8The shareholder structure of Petrobras is shown inExhibit 5.

Another significant change affected Petrobras's financing strategy. Petrobras had played a key role in the government's fiscal policy. It was the largest Brazilian taxpayer, as well as the largest distributor of dividends and royalties. Petrobras's net profit represented almost 25% of the overall primary surplus of the consolidated public sector, or roughly 1% of the Brazilian GDP. Petrobras's capital expenditures were included in the government's budget and the company's investments and indebtedness were therefore subject to restrictions tied to the country's fiscal policy. From July 2002 on, The International Monetary Fund, or IMF, no longer considered Petrobras's investments part of the government's budget, thus removing any restrictions to its financing strategy.

Along with the changes in its ownership and control, Petrobras streamlined its management structure and implemented new management policies. The changes included the adoption of a new long-term strategic plan, the introduction of business units, the integration of some subsidiaries into the company as divisions to promote synergies and minimize functional overlaps, and the introduction of performance targets. Under the leadership of the current CEO, Francisco Gros, the company defined the role and responsibilities of the Board and the executive directors, created committees to advise top management, and issued guidelines for corporate governance, best practices and ethical conduct.

The main objective of these changes was to transform Petrobras into a state-owned company able to compete with the same agility and freedom as a privately owned corporation. These changes appeared to be paying off. Statistical studies indicated that from 1999 to 2001, Petrobras migrated from a typical Brazil-risk stock, trading in close correlation with country risk, to something closer to a global oil company, reacting more to swings in crude oil prices. The market capitalization of Petrobras almost tripled during this period.Exhibit 6provides data on the company's stock price history .

In 2001, on a consolidated basis, Petrobras's net revenues were $24.5 billion (seeExhibit 7for Petrobras's financial statements). The company planned capital expenditures amounting to $28.2 billion through 2005, with 45% directed to exploration and production and 23% to international projects (not including potential acquisitions). The company's adjusted net debt of $11.1 billion gave a debt-to-total-capital ratio of 38%. Of the company's financial debt, 88% was denominated in foreign currency.

Petrobras' Strategy

Some analysts judged that the recent changes in Petrobras's ownership and control and its new emphasis on a more flexible and responsive management structure put Petrobras in a different league from state-owned Latin American oil companies such as Pemex and PDVSA (seeExhibit 8for key statistics on Petrobras and other Latin American oil companies). Alexandra Strommer, a J. P. Morgan senior analyst, explained:

Petrobras had a very peculiar position within the oil industry. The company could not be considered a typical Latin American oil company like PDVSA or Pemex because it was already much more market-oriented and had more of a private-company mentality. Also, it was not a net exporter, focused on the external markets, but very much Brazil-centric. Additionally, despite its size, Petrobras did not seem to fit among the major oil companies, since it was not really global, even though it has a sizable integrated structure.9

While Petrobras was not yet a global oil company, it was committed to geographic diversification. Petrobras's stated objective was to build a portfolio of upstream assets in Latin America, the Gulf of Mexico, the Caribbean, and West Africa. The common theme behind that geographic focus was for Petrobras to leverage its deepwater expertise acquired in the Campos Basin. Moreover, since 95% of Petrobras's upstream reserves were exposed to the risks of a single country, Brazil, the company had a strong strategic rationale for enlarging its international activities. The acquisition of an Argentinean company was in line with Petrobras's strategy of expanding outside Brazil.

Pecom

The origins of Pecom went back to 1946, when the Perez Companc family incorporated the firm as a shipping company. However, it was only in 1960 that the company got involved in the oil business. Gradually, Pecom developed an appetite and skills for the oil industry and, in 1990, the company gained its first major oil concession. In 1994, Pecom took another important step when it started operations in Venezuela and then expanded into Brazil, Bolivia, Ecuador and Peru. In 1998 Pecom was consolidated as a vertically integrated energy company. The firm listed its shares on the Buenos Aires Stock Exchange in January 2000 and launched an ADR program on the New York Stock Exchange. Pecom's corporate structure is shown inExhibit 9.

Upstream and Downstream Activities10

Pecom's exploration and production activities were its main cash source, with drilling accounting for 69% of its adjusted EBITDA. Pecom's proven developed and undeveloped reserves were estimated around one billion boe.11About 42% of Pecom's total reserves were in Argentina, and 58% were in operations in five other South American countries. Pecom forecast that its total production in 2005 would reach 400 tbpd, with most of this coming from outside Argentina.

Pecom's downstream activities included refining operations in Argentina and Bolivia. Although these interests represented just 7% of Pecom's adjusted EBITDA as of December 2001, refining was a key part of Pecom's long-term strategy, representing an important link in the business value chain. Petrochemicals represented 8% of Pecom's adjusted EBITDA in 2001. It had the region's largest capacity for styrene and polystyrene production, and was a leader in Argentina in these products. In addition, Pecom had over a one-third share of the fertilizer market in Argentina. Among Pecom's other activities were its investment in TGS, the largest transporter of natural gas in Argentina, and interests in the generation, transmission, and distribution of electricity in Argentina. Pecom operated 75% of the country's high-voltage power transmission system, and had an exclusive license to serve both the residential population and commercial firms in the central and southern Buenos Aires metropolitan area.

Pecom and the Financial Crisis in Argentina

Like many oil companies with hard, bankable assets, Pecom opted for relatively low-cost dollar borrowings in the 1990s, on the assumption that its primary products - crude, gas, and refined products - would remain priced in dollars (seeExhibit 10for Pecom's exposure to the domestic market and export opportunities). In July 2001, for instance, Deutsche Bank, a commercial bank, led a syndicate of banks to underwrite Pecom's four-year, $220 million unsecured floating rate note with a 9.3% all-in cost, substantially below the 16% Argentine sovereign bonds.12

In January 2002, however, the Argentine government abandoned its Convertibility Law, which fixed the Argentine peso at exactly one U.S. dollar and opted for a "pesification" of the economy. All U.S. dollar-denominated deposits in the financial system were converted at a rate of 1:1, while all U.S. dollar-denominated debts incurred in the Argentine financial system were converted at a rate of 1.40:1. The government decided to compensate financial institutions for the difference with a bond that had not yet been issued in July 2002. Firms that had incurred debt in U.S. dollars abroad were forced to cancel them through the open exchange rate market. On July 15, 2002, the U.S. dollar was quoted at AR$3.58

The financial crisis in Argentina had a severe impact on Pecom. Less than 10% of Pecom ?s loans, and none of its foreign bond debt, were covered by the pesification. Pecom still faced mostly dollar- based debts, but revenues from some of its commercial agreements denominated in dollars and adjusted per the U.S. producer price index were converted into pesos at a 1:1 rate, and indexation was eliminated. These peso revenues were far below world market prices since domestic prices did not rise at the same rate as the devaluation. Pecom also faced a pending export tax that could be levied on up to 40% of the company's Argentine oil export revenue. In March 2002, Pecom held $231 million in cash and short term investments and its debt and other financial obligations to the end of the year amounted to $840 million (seeExhibits 11a and 11bfor Pecom's debt profile). Pecom's vice chairman, Oscar Vicente, painted a grim picture of Pecom's situation: "I have half or less of the pesos I need to buy the dollars I have to pay. A group like Perez Companc is not viable in this situation."13

Although the medium- and long-term business view was still promising, the short-term scenario had put the company at a crossroad. Pecom and its external advisors had been working on different alternatives since the end of 2001, without a clear or easy solution. The company owned sound assets, but it could not simply divest selected assets without jeopardizing its longer-term growth prospects (seeExhibit 12,13, and14for Pecom's actual and estimated financial statements). Simultaneously, the local banking system was in crisis and international bankers were reluctant to increase their exposure to an emerging market company. Pecom's management and shareholders had to come up with a solution before they were out of cash or credit. A senior analyst from Merrill Lynch explained:

It is necessary to look at whether the company really does have the cash flow to continue to endure the crisis. Whatever the long-term cash-flow generation capability of the company, the ability to meet its debt maturities and interest payments is key to preserving equity value.14

Petrobras's Proposed Acquisition of Pecom

The acquisition of Pecom by Petrobras offered the Argentinean firm a solution to its current financial problems and it was in line with Petrobras's strategy of geographic diversification. It was not clear, however, if the acquisition would be feasible. The deal would require regulatory approval, Argentina was in the midst of a financial crisis, and Brazil faced economic challenges of its own. Many Brazilians feared that the crisis would spread to their country, and were concerned about the fiscal deficit and the continuing depreciation of the Brazilian Real against the U.S dollar (seeExhibit 15for average monthly exchange rates). There was also considerable political uncertainty in Brazil because of the upcoming general elections in October 2002. Some businesses feared that the leading candidate for president, Luiz Incio Lula da Silva of the Workers' Party, would change Brazil's existing economic and legal framework if elected president. A roll back of privatization, or at least a freeze on it, were among the Workers' Party's proposals, and it was not clear what impact this might have on Petrobras.

Batista therefore faced a demanding task in evaluating the proposed acquisition of Pecom. The transaction initially envisioned by Petrobras's CEO Gros and Batista covered Petrobras's purchase of 58.6% of the total capital of Pecom from the Perez Companc family and the Perez Companc Foundation. In a separate transaction, Petrobras would also acquire 47.1% that the Perez Companc family held in Petrolera Perez Companc.15Batista and his team prepared pro forma consolidated figures to detail the increases in oil and gas reserves and refining capacity that would be gained, and to show how the acquisition would affect debt and income (see

Exhibits 16afor Pro Forma Operating Figures andExhibit 16bfor Pro Forma Financial Data).

Valuation Approaches

Batista had emphasized the need to build a cash flow model and run sensitivity analysis in the valuation of Pecom. The most complex issue confronting Batista was how to account for country risk in the cost of capital. Latin America's long tradition of economic and political instability exposed companies to a myriad of risk factors, including currency devaluation, repatriation, capital controls, and expropriation, but these risks changed over time and varied from country to country. Over the last decade, both Argentina and Brazil had embraced reforms backed by the International Monetary Fund (IMF) and the World Bank. Measures such as exchange rate stabilization, freer capital flow mechanisms, lower import tariffs to encourage trade, and privatization of state-owned companies were put into practice to pave the way toward integration with global economies.17Argentina, however, was again in financial crisis, and determining the appropriate country risk premium to use for the Pecom valuation proved challenging for Batista and his team.

Country risk premiums were most commonly derived from J. P. Morgan's Emerging Market Bond Index (EMBI), which measured the spread between external sovereign debt instruments of emerging markets with U.S. Treasury Bills of similar duration. As shown inExhibit 17,Argentina and Brazil had similar country risk premiums up to mid-2001. By 2002, Argentina's country risk had increased so much that some team members argued that incorporating this risk premium into the discount rate for the Pecom valuation was problematic (seeExhibit 18for sovereign risk premiums and market valuation indicators). They suggested that the cost of capital could instead be derived from current analyst estimates of the weighted average cost of capital for oil companies, including Petrobras and Pecom (seeExhibits 19aand19bfor cost of capital estimates), or from cost of equity estimates for different countries, including Brazil and Argentina (seeExhibit 20).Other team members, though, questioned how relevant such estimates were to the Pecom valuation.

The uncertainty about the country risk premium and the appropriate cost of capital to use in a cash flow model led Batista and his team to consider other valuation approaches in their analysis. They compared the valuations of selected companies, examining their multiples on a range of variables including reserves, EBITDA, cash flow and earnings (seeExhibit 21). BOE multiples were another common valuation measure used in the oil industry, andExhibit 22provides information on the BOE multiples for recent transactions. BOE multiples, however, did vary considerably across transactions, and also according to the location of reserves, as shown inExhibit 23.In analyzing the different market-based valuations, team members debated which companies were most comparable to Pecom and which transactions could usefully be compared to the proposed acquisition.

Funding Strategy

Another point the board would raise was the question of Petrobras's financing strategy for the acquisition. Funding the acquisition with cash, securities, or a combination of both would be a sensitive matter. Petrobras was a well-recognized name, but market conditions were deteriorating by July 2002. Raising local funds meant paying high local interest rates with maturities shorter than 3 years. International markets were virtually closed to corporate bonds coming from emerging markets.18Finally, floating equity at that point could send a troublesome signal regarding Petrobras's current price truly reflecting its inherent equity value, thus jeopardizing the market expectation that Petrobras could lower its cost of capital, and consequently boost future results and market performance.19

As Batista organized his notes for the Board meeting, he reflected on the issues he and his team had discussed in the previous weeks. Was the Pecom acquisition a sound opportunity to increase Petrobras's diversification, or was it a risky venture during an unsettled time? The price offered for Pecom would at least in part determine the answer, and Batista wanted to be sure that his valuation of Pecom provided the Board with the information it needed to make a decision.

Exhibit ]]a PEREZ Company Seven - year Debt Refinancing Schedule ! Estimates as of March 31, SUNK in $ millions !* I Year I'VEars. Years * Years 5. K'ears 6 Years 7 Years Jank Loans $34 15:4 147 D D Bonds Total 927 147 204 3:48 Source : Adapted by carewriter from Frank I. MEGann and Marcus Exqueira, " Perez Company - Can it weather the storm ?" Merrill Lynch, June 2, 1972. P . S. Exhibit 1]b Perez Company : Debt Breakdown by Type | Estimates as Of March 31, 201/2 in $ millions ! . I 'Year Years 1 - 7 *` Total Total 945 9^ ^ Bands Foreign Bank's 425 BUZ Trade Finance Local Bank's 5.1 5:2 Accrued Interest 5 0 5 0 10^' Total 927 2, 219 Source : Adapted by casewriter from Frank I. Mccann and Marcus Exqueira, " Perez Company - Can it weather the storm ?" Merrill Lynch, June 2, 2072. P . S.Exhibit 12 Perez Company Cash Flow Forecast ( in & millions !* 199.9 A ZOODA ZOOTA ZOOZE ZOOBE ZOO4E 200.5 E ZOOGE ZOOTE CASH FLOW Net Income from operations* 175 235 151 32 125 1.42 2:30 3:47 DE predation 196 220 3:05 26.5 267 317 317 317 Exploration expense 13 14 12 12 10 10 10 10 Gross Cash Flow - Perez Compant 462 3:05 358 418 519 BIT 674 DEE 475 Earnings - unconsolidated attilates - 42 - 50 - 37 - 41 - 43 - 45 Dividends _ unconsolidated attilates* $ 4 $ 4 O O Gross Cash Flow - adjusted for equity affiliates 352 456 147 25 8 321 379 ATB 574 6:29 Capital Expenditures 576 - 794 196 295 491 4.91 401 Dividends . 6.3 . 6.5 $ 4 - 43 -52 58 Met Gross Cash Flow - Discretionary - 175 - 178 - 3.82 210 122 - 19 73 125 DB Not Gross Cash Flow - Discretionary - adjusted for equity attillates* -18.4 - 41 1 160 8.5 41 30 SOURCE : Adapted by casewriter from Frank J. Mccann and Marcus Ezqueira, "Perez Company - Can it weather the storm ?" Merrill Lynch, June 7, 202, PE. E.Exhibit IS LEVEE Lampand Injected balance Sheet lin & millions unless otherwise Stated ! `` `t December , 41 20 01` ZOOZE ZOOGE ROUTE A.5.5 ETS Current Assets. Cash and cash equivalent 254 274 5.51 45.5 5.5.5 Accounts receivable* 5:41 453 491 51B 75.5 Inventories* 147 1.56 1 13 123 130 145 Total current assets 1. 042 1. 051 1. 471 Non current Assets. Accounts receivable 50 BE 1 13 IZE LE Inventories LE 6.3 TZ Investments 1 . 194 1 , 251 1 . 125 357 3:45 4.35 ATT 521 56 7 Fixed assets 2 , 561 2.490 3. 5.50 2.310 2.071 1. 522 1. 542 1 . 564 Others Total non-current assets 3. 9.91 4, 416 2, 614 2, 5.24 2. 5 24 2. 60.5 2. 83.3 Total Assets. 5. 03.3 5, 4 BT 6. TED 3. 86.5 3. 8.94 3. BE3 4. 470 LIABILITIES AND STOCKHOLDERS EQUITY Current Ilabilities. Accounts payable 235 27 4 GEE Short-term debt 30.5 BEL 1. 26} 1 , 274 1. 294 1 . 295 Other current Lab ties ZIT 2:34 247 ZTE 324 Total current Lab ties 5: 4 4 10, 125 \. BITT 2.058 Non- current Ilabilities. Long-term debt 1 . 512 1, 410 1. 403 1 , 003 1, 003 Other Lab tes 204 1 14 ELL 1 15 IZE Total non- current ( at tes LEE 1. 582 BIB 7:31\ Total Liabilities.* 2, 460 3, 373 2, 810 2, BED 2. 7TZ 2, 795 Minority Interests* 75 8.3 45 Total Stockholders " Equity 2. 556 2, JOB 2, 7:36 980 95.5 9.8 4 1, 08.5 1 , 2 BY 1, 5 85 Total Liabilities*& Equity 5 , 03.3 5 , 4 BT 6, 180 3, 86.5 3, 8.94 3, 863 3, 944 4 , 173 1, 470 20 0 0^ BOOZE LODGE ZOOKE ZDOSE ZOOGE ZOOTE Balance Sheet Ratios Total LT debticapital 37^ 4:21^ Total LT Lab Has / Capita 4236 37^ 5:3% 45% 35% 32% Total LT Lab Thes & ST 4 5^ 71 3` 71 ^ TOSS 5 596 Total debt i capital 4 1 % 42%^ 57^ 51 % Net DebtiNet Capital 3:59 6.2%` 5:496 4896 Black Value/ Share In # ] 3. 28 3.47 3. 51 1 . 20 1. 23 1. 3.5 1. 51.5 Return on average capital 5. BUT` $1. 4^ 13. 30%` 14. 20^ 25. 20` 24.50% Total debt 1. 917 2. 145 Z ETT 2. 2BZ Z. JET 1. 302 debt less Cash 1 . 603 2.031 1, 49 5 1, ATE 1. 375Exhibit 14 Perez Company Consolidated Earnings Model ( in & millions unless otherwise stated ! ```ISE Oil & Gas Production 674 THE 4 42^ 1 , 11.5 1, 28 4 ASSUMPTIONT` `` Sales thousand at bands por dari* DEL 125 1 19 125 1 6^ 17^ Gas Sales / million d outin minors per day! 10 10 11 11 WTI BAG bandy 25 DE A`Tags oil sale price for band! ! 15 17 15 14 15 17 17 14 Average gas sales price Is For than and on; $5 27 Andjustnor` Eliminating` - 10 Petrochemical & Flatining 543 717 750 460 5:30 5.50 5.01 6:25 Electricity 140 158 1 8 4 TO 1 10 155 217 220 Distribution & Transportation 25 BE 19 23 25 ZB 31 Man-Energy Sales 50 LE 95 40 ZE 31 41 45 Eliminations GEL - BEE - - 139 - 45 105 - 115 - 127 - 15.3 Total Consolidated Sales 1 , 240 1 , 546 1, 654 1, 155 1, 365 1, 440 1, BET 2, 057 Operational Income Oil& Gas Production 246 ZEE 201 31.3 $47 5:24 Petrochemical & Flatining 21 65 35 1 1 24 42 AT 49 52 Electricity 43 32 42 5 7 47 95 Distribution & Transportation* 4 Non-energy Operational Income 10 35 25 ZE ZE 31 Corporate & Eliminations* - 4 4 . TO - 25 - 27 -21 -23 .35 Total Operational Income 312 SEE 402 25% 397 EBITDA 521 6.3.3 TIE 541 619 696 795 $12 9.95 Net Financial EXPENSES - 124 - 157 -206 - 220 - 230 225 - 195 - 165 - 165 Pre tax Ing ITB ZED 175 35 105 172 271 414 497 Tax laverage tax rate at 3:596) - 15 - 14 - 10 - 10 - 40 - 191 135 Minority Interest - 10 - 10 - 5 - 6 - 10 - 13 - 15 Net Income before Extraordinary Items* 175 235 151 26 129 1.58. 297 3.58 LE Extraordinary Items 130 41 5.5 26 O O U FX Gains [Losses ! _ Parent / Subsidlanes O O - 514 - 5.5 - 49 - 4 4 O EE Income on non- current Investments . Y PF Net Income 3.38 28.3 102 46.3 15 149 25.5 358Exhibit IGa Pro Forma Operating figures ( as of December 201 1 Petrobras Pecom Pro Forma Proven RESERVES Oil ( million bb!* 7. 740 BEL Gas / billion cubic meters ) 25.3 40 294 Combined ( million boe ! 4, 257 1. 010 10, 267 Production Oil I thousand barrels per day ! 1 , 374 125 1. 5:014 Gas ( million cubic meter per day ! 30 10 Combined I thousand bee per day ! 1. 505 1 81 Downstream International Flofining Capacity I thousand bad) 41 124 15.5 BEL Gas Stations in Argentina $35 Gas Transportation Lines [ kilometers ! 14. 5:00 Source : Adapted by casewriter from , "Perez Company Acquisition Cherview," Power Point Presentation , July 2072. Petrobras SA, Investor Relations . Exhibit 16b Pro Forma Financial Data las of March Petrobras Pecan* Pro Forma Balance Sheet and Market Data Total Assets $7 , 110 3, 446 10. 505 Total Debt 14, 016 2, 3:30 16, 346 Shareholder's Equity ( Book value ) 12, 656 13, 060 Cash and cash equivalents* 6 , 445 230 5, 926 Net Debt 7. 571 2, 094 10, 420 Income and Cash Flow Statement Data Sales 12, 724 1. 55.5 $4, 270 EBITDA $1, 5:4 4 4, 223 Net Income 2. 653 Capital Expenditures | CAPEX! 4, 620 747 5, 376 Source : Adapted by casewriter from, "Perez Company Acquisition Cherview," Power Point Presentation , July 202. Petrobras EA, Investor Relations.Exhibit 1& Market Valuation Indicators as of March 24, LOVE, unless noted otherwise ! Petrobras PECOM Market Indicators Buta Y Year Brazilian Sovereign Flick Buta & Years 0.94 LE'D Argentine Sovereign Plisk 5.013 Market price 5. 20. 47 58. 12 Treasury 10 Years 5. 40^' Treasury 30 Years 5. #``'0Exhibit 21 Valuation Tables for Selected Companies (as of March 28, 2002) Price EV Price (US$) Reserves EBITDA Debt Adjusted Cash Flow Cash Flow Earnings 2001A 003E 2001A 2003E 2001A 2002E 2003E 2001A Supermajors BP BP 53.1 198 8.1 6.2 8.3 7.1 7-3 15.7 10.9 CVX 90.3 98.8 7.3 6.3 6.3 10 43.8 7.1 8.9 7.7 9.2 11.4 9.6 9.1 10.9 15.6 Royal Dutch 54.3 113. 1 5.4 4.7 6.7 7.8 6.8 5.8 7.6 6.4 12 10.6 Shell Transport 4.9 515 4.8 6.9 7.9 6.9 6.9 7.7 6.5 141 10.8 Total Fina Elf 5.7 5.9 6.9 7.3 6.5 7.2 6.1 14 14.5 11.5 7.3 6.1 8.1 7.7 8.3 8.4 7.4 13.4 16.6 Occidental 10.9 6.8 4.8 5.7 5.2 5.3 9.9 48.8 2.2 6.9 3.6 3.7 3.7 212 6.7 BG BRG 22.3 15.7 10 14.2 18.6 11.7 EN 72.1 57.6 9.4 4.9 8.1 8.3 6.8 5.4 49 Norsk Hydro NHY 47.9 12.3 6.9 4.3 3 3.3 17.7 16.9 14.7 3.7 62.8 42.6 8.6 16.3 19.8 10.9 14.5 10.2 Repsol YPF REP 12.7 15.5 4.7 6.6 3.1 3.7 5.2 5.4 5.5 3.1 318 4.5 3.8 Statoil STO 7.8 17.1 4.5 2.5 2.6 2.2 2.9 2.3 3.8 5.3 4.1 3.8 5.3 41 Weighted Average 9.3 6.3 4.6 9.8 10.6 7.8 5.6 4.7 73 8.9 6.7 Emerging Oils Lukoil LUKOY 11.1 1.1 3.8 4.5 3 4.6 5.4 3.6 3.8 6.1 3.5 MOL MOLHB 1.7 NA 8.5 NA NA 8.9 NA NA NA 21.3 NA NA Sibneft SBKYY 17 3.4 6.3 7 6.8 7.6 5.9 5.7 31.9 33 YUKOY 124 18.4 2.2 5.2 3.8 6.2 6.8 SNGSRU 11.4 13 1.2 2.9 NA NA NA PetroChina PTR 20.9 3.6 2.6 3.2 Sinopec SNP 16.2 0.3 7.6 8.4 5.5 G.1 PKN PKNPW 18.7 1.9 NA 5.8 7.6 3,2 4.8 3.8 4.8 3.9 31.9 PBR 26.5 28.7 2.9 2.8 2.8 3.7 3.6 4.3 26 3.6 4.3 3.8 6.1 5.2 5.4 4.3 6.6 5.9 4.6 15.4 12.3Exhibit 7 Petrobras Balance Sheet and Income Statement- U.S. GAAP (in $ millions) As of December, 31 2001 2000 1999 ASSETS Current Assets Cash and oash equivalent 7,360 5,826 3,015 Accounts roocivablo 2,759 2,211 1,575 Inventories 2,399 3,087 2,270 Other ourrent assols 1.808 1,402 1,307 Total ourrent assok 4 320 12 525 8.167 Permanent Assets Proparty, plant and equipment 19,179 19,237 18,426 Roodivables from Brazilian Government 746 5,051 4,925 Others 2,613 2,322 2,215 Total non-current assets 22,538 26,610 25,566 Total Assets 36, 864 39, 136 33,733 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities Trade accounts payable 1,783 2,011 1,31 Short-term debt 2,041 4,080 5,765 Other ourrent liabilities 4,220 3,549 2,732 Total current liabilities 8, 044 9,640 9,811 Non-current liabilities Employees post retirement benefits 3,380 4,319 5, 163 Projool financings and capital lease obligations 5,083 3,426 1,781 Long-term debt 5,908 4,833 4,778 Other liabilities 1,123 2,060 1,241 Total non-current liabilities 15,494 14,638 12,963 Total Liabilities 23,538 24,278 22,774 Minority Interests 79 153 237 Total Stockholders" Equity 13,247 14,705 10,722 Total Liabilities + Equity 36,864 39, 163 33,733 As of December, 31 2001 200 1999 Total Revenues 34,145 35, 496 23,467 Value-added taxes, freight, and specific parcel price -9,596 -8,541 -7,109 Net Revenues 24,549 26, 955 16,358 CoGS -12,807 -13,449 -8,210 Gross Profit 11,742 13,506 8, 148 Total Depreciation, depletion and amortization -1,729 -2,022 -2,262 Exploration -549 -477 -295 Selling, gonoral, and administration expenses -1,751 -1,450 -1,282 Research and development expenses -132 -152 -132 Total Cost and Expenses -4,161 4,101 -3,971 Operating Income 7,581 9,405 4,177 Non operating homs -1,361 -1,126 -723 Income bolore Financial Roms 6,220 8,279 3,454 EBITDA 8,498 10,778 6,011 Financial Income (Expenses) 567 204 213 Net Income before Extraordinary loms 4,749 5,821 2,487 Net Income (average tax rate of 35%) 3,491 5,342 727Exhibit & Petrobras , PEmex, PLIVSA, and Pecom - KEY Statistics Petrobrasa ILIVEAL LECOM Operating Figures - 2001 Combined reserves | billion boo! 4.` 103. 4 1. 1 Combined production 1. 5BE 3.973 18 4 BEE "# Lifting and production costs 15) 2.17 2.72 Production cost per barrel 15) 4. 65 4. DE 6. 4 Financial Data ( in 5 million ) - 2001 Total assets 32, 340 $0. 413 57. 542 $, 194 Total Debt 18, 491 37. 404 12, 278 Shareholder's Equity ( book value ) 12, 463 13, 430 Not Debt 1 1, 1 1 8 $6, $14 11, 348 1 . 674 EEITOA 1 1. 167 Net Income 4, 194 2.943 Stock Returns |as of March 28, 2402 ) 1 Year 3 Years 127^ 5 Years Source : Compiled and adapted from Rodrigo Lopez _ rodrigo lopez chase . com,"Dada - Relaturin Petrobras, " to Ricardo ReisEn de Finho _ TreisEnthibe. Edu`, March ?, zang, and March 17, 194, and companies reports* Brazilian GAAF Petroler Mexicans , Mexican State - owned oil company* Petroleos de Venezuela, GA. Venezuelan State-owned oil company