Summary & Additional Question

WACC

NPV-DCF

Comparables

Case Title PageDrilling South: Petrobras Evaluates PecomHarvard Business School Case 204-043Course Software 204-711This course software was prepared solely as the basis for class discussion. Cases are not intended to serve asendorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2004 President and Fellows of Harvard College. No part of this product may be reproduced, stored in aretrieval system, used in a spreadsheet or transmitted in any form or by any meanselectronic, mechanical,photocopying, recording or otherwisewithout the permission of Harvard Business School.

Exhibit 7Exhibit 7 Petrobras Balance Sheet and Income Statement U.S. GAAP (in $ millions)As of December, 31200120001999ASSETSCurrent AssetsCash and cash equivalent7,3605,8263,015Accounts receivable2,7592,2111,575Inventories2,3993,0872,270Other current assets1,8081,4021,307Total current assets14,32612,5268,167Permanent AssetsProperty, plant and equipment19,17919,23718,426Receivables from Brazilian Government7465,0514,925Others2,6132,3222,215Total non-current assets22,53826,61025,566Total Assets36,86439,13633,733LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesTrade accounts payable1,7832,0111,314Short-term debt2,0414,0805,765Other current liabilities4,2203,5492,732Total current liabilities8,0449,6409,811Non-current liabilitiesEmployees post retirement benefits3,3804,3195,163Project financings and capital lease obligations5,0833,4261,781Long-term debt5,9084,8334,778Other liabilities1,1232,0601,241Total non-current liabilities15,49414,63812,963Total Liabilities23,53824,27822,774Minority Interests79153237Total Stockholders Equity13,24714,70510,722Total Liabilities + Equity36,86439,16333,733As of December, 31200120001999Total Revenues34,14535,49623,467Value-added taxes, freight, and specific parcel price-9,596-8,541-7,109Net Revenues24,54926,95516,358CoGS-12,807-13,449-8,210Gross Profit11,74213,5068,148Total Depreciation, depletion and amortization-1,729-2,022-2,262Exploration-549-477-295Selling, general, and administration expenses-1,751-1,450-1,282Research and development expenses-132-152-132Total Cost and Expenses-4,161-4,101-3,971Operating Income7,5819,4054,177Nonoperating Items-1,361-1,126-723Income before Financial Items6,2208,2793,454EBITDA8,49810,7786,011Financial Income (Expenses)567204213Net Income before Extraordinary Items4,7495,8212,487Net Income (average tax rate of 35%)3,4915,342727Source: Adapted from F. J. McGann and M. Sequeira, US GAAP results show no surprises, Merrill Lynch, July 1, 2002.

Exhibit 8Exhibit 8 Petrobras, Pemex, PDVSA, and Pecom Key StatisticsPetrobrasaPemexbPDVSAcPecomOperating Figures - 2001Combined reserves (billion boe)9.353103.41.1Combined production1,5684,3383,973184Lifting and production costs ($)3.263.342.172.72Production cost per barrel ($)4.854.063.766.4Financial Data (in $ million) - 2001Total assets32,39060,91357,5426,194Total Debt18,49137,99412,2732,656Shareholders Equity (book value)12,48313,43937,0982,817Net Debt11,11836,41411,3481,674EBITDA9,36226,66811,167693Net Income4,194-3,7293,993102Stock Returns(as of March 28, 2002)1 Year15%-43%3 Years127%-47%5 Years44%-67%Source: Compiled and adapted from Rodrigo Lopes , Dados Relatorio Petrobras, to Ricardo Reisen de Pinho , March 7, 2003, and March 13, 2003, and companies reportsaBrazilian GAAPbPetroleos Mexicanos, Mexican state-owned oil companycPetroleos de Venezuela, S.A., Venezuelan state-owned oil company

Exhibits 11a, 11bExhibit 11a Perez Companc: Seven-year Debt Refinancing Schedule (Estimates as of March 31, 2002 in $ millions)1 Year2 Years3 Years4 Years5 Years6 Years7 YearsBank Loans8341591478620206Bonds93285001893780Total927444147862093986Source: Adapted by casewriter from Frank J. McGann and Marcus Sequeira, Perez Companc - Can it weather the storm? Merrill Lynch, June 3, 2002, p. 5.Exhibit 11b Perez Companc: Debt Breakdown by Type (Estimates as of March 31, 2002 in $ millions).1 YearYears 1-7 Total% TotalBonds9394510%Foreign Banks43580254%Trade Finance29236480%Local Banks515298%Accrued Interest5656100%Total9272,21942%Source: Adapted by casewriter from Frank J. McGann and Marcus Sequeira, Perez Companc - Can it weather the storm? Merrill Lynch, June 3, 2002, p. 5.

Exhibit 12Exhibit 12 Perez Companc Cash Flow Forecast (in $ millions)1999A2000A2001A2002E2003E2004E2005E2006E2007ECASH FLOWNet income from operations1752351513279125192290347Depreciation196220305265267284317317317Exploration expense13719121210101010Gross Cash Flow Perez Companc384462475309358418519617674Earnings unconsolidated affiliates-99-89-92-50-37-40-41-43-45Dividends - unconsolidated affiliates678464000000Gross Cash Flow - adjusted for equity affiliates352456447258321379478574629Capital Expenditures-496-576-794-98-196-295-491-491-491Dividends-63-65-640-39-43-48-52-58Net Gross Cash Flow - Discretionary-175-178-38221012280-1973125Net Gross Cash Flow Discretionary adjusted for equity affiliates-207-184-4111608541-613080Source: Adapted by casewriter from Frank J. McGann and Marcus Sequeira, Perez Companc - Can it weather the storm? Merrill Lynch, June 3, 2002, pg. 6.

Exhibit 13Exhibit 13 Perez Companc Projected Balance Sheet (in $ millions unless otherwise stated)As of December, 311999A2000A2001A2002E2003E2004E2005E2006E2007EASSETSCurrent AssetsCash and cash equivalent254274581485655691616622693Accounts receivable641627566453491518579679755Inventories147170156113123130145170189Total current assets1,0421,0711,3031,0511,2691,3391,3401,4711,637Non current AssetsAccounts receivable50779676828697113126Inventories7793976368728095105Investments1,1941,2511,126357395435477521567Fixed assets2,6612,9903,5502,3102,0711,9221,9421,9642,026Others958889999Total non-current assets3,9914,4164,8772,8142,6242,5242,6052,7022,833Total Assets5,0335,4876,1803,8653,8943,8633,9444,1734,470LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable180249318239260274306359399Short-term debt3057391,2691,2741,2791,2841,2891,2941,299Other current liabilities159141269217234247276324360Total current liabilities64410,1291,8561,7301,7731,8051,8711,9772,058Non-current liabilitiesLong-term debt1,6121,4101,4031,0031,003903803703603Other liabilities20417211477838898115128Total non-current liabilities1,8161,5821,5171,0801,086991901818731Total Liabilities2,4602,7113,3732,8102,8602,7962,7722,7952,789Minority Interests176871757983879195Total Stockholders Equity2,5562,7082,7369809559841,0851,2871,586Total Liabilities & Equity5,0335,4876,1803,8653,8943,8633,9444,1734,4701999A2000A2001A2002E2003E2004E2005E2006E2007EBalance Sheet RatiosTotal LT debt/Capital37%33%33%49%49%46%40%33%26%Total LT liabilities/Capital42%37%36%52%53%50%45%39%32%Total LT liabilities & ST Debt/Capital45%46%50%71%71%70%67%62%56%Total debt/Capital41%42%48%67%67%65%62%57%51%Net Debt/Net Capital38%39%42%62%59%56%54%48%40%Book Value/Share (in $)3.283.473.511.261.231.261.391.652.03Return on average capital7.20%9.20%5.80%1.80%8.40%13.30%19.20%25.20%24.90%Total debt1,9172,1492,6722,2772,2822,1872,0921,9971,902Debt less Cash1,6631,8752,0911,7921,6271,4961,4761,3751,209Source: Adapted by casewriter from Frank J. McGann and Marcus Sequeira, Perez Companc - Can it weather the storm? Merrill Lynch, June 3, 2002, pg. 31.

Exhibit 14Exhibit 14 Perez Companc Consolidated Earnings Model (in $ millions unless otherwise stated)1999A2000A2001A2002E2003E2004E2005E2006E2007ESalesOil & Gas Production5897198916747848299271,1151,284Assumptions:Oil Sales (thousand of barrels per day)96100125120119125134158176Gas Sales (million of cubic meters per day)6610999101111WTI ($ per barrel)193026222523242425Average oil sale price ($per barrel)151716141616171718Average gas sale price ($ per thousand cm)404542202427293032Adjustments/Eliminations-2-3-6-6-7-7-8-9-10Petrochemical & Refining543717750460539559591625662Electricity1401581647096110155217229Distribution & Transportation83538192123252831Non-energy Sales595649283134374145Eliminations-99-139-238-95-105-115-127-139-153Total Consolidated Sales1,2401,5461,6541,1551,3661,4401,6081,8872,097Operational IncomeOil & Gas Production189246266201279313362447524Petrochemical & Refining216535112442474952Electricity809399293242578286Distribution & Transportation565647833334Non-energy Operational Income1049352526282931Corporate & Eliminations-44-62-70-25-27-29-31-33-35Total Operational Income312402386259335397466578662EBITDA521633716541619696799912995Net Financial Expenses-134-157-206-220-230-225-195-165-165Pre tax Income17826017539105172271414497Tax (average tax rate of 35%)-8-15-14-10-19-40-69-111-135Minority Interest5-10-10-5-6-8-10-13-15Net Income before Extraordinary Items1752351512681129198297358Extraordinary Items13041-552600000FX Gains (Losses) Parent/Subsidiaries000-514-66-55-49-440Income on non-current investments - YPF3300000000Net Income338283102-4631574149255358Source: Adapted by casewriter from Frank J. McGann and Marcus Sequeira, Perez Companc - Can it weather the storm? Merrill Lynch, pg. 16, 17, and 29.

Exhibits 16a, 16bExhibit 16a Pro Forma Operating Figures (as of December 2001)PetrobrasPecomPro FormaProven ReservesOil (million bbl)7,7497398,488Gas (billion cubic meters)25346299Combined (million boe)9,2571,01010,267ProductionOil (thousand barrels per day)1,3791251,504Gas (million cubic meter per day)361046Combined (thousand boe per day)1,5961811,777DownstreamInternational Refining Capacity (thousand bpd)91124155Gas Stations in Argentina707128835Gas Transportation Lines (kilometers)7,5007,00014,500Source: Adapted by casewriter from, Perez Companc Acquisition Overview, PowerPoint Presentation, July 2002. Petrobras S.A, Investor Relations.Exhibit 16b Pro Forma Financial Data (as of March 31, 2002)PetrobrasPecomPro FormaBalance Sheet and Market DataTotal Assets37,1193,44640,565Total Debt14,0162,33016,346Shareholders Equity (Book value)12,65670013,066Cash and cash equivalents6,4452365,926Net Debt7,5712,09410,420Income and Cash Flow Statement DataSales22,7241,55524,279EBITDA8,5446899,233Net Income2,883-3922,653Capital Expenditures (CAPEX)4,6297475,376Source: Adapted by casewriter from, Perez Companc Acquisition Overview, PowerPoint Presentation, July 2002. Petrobras S.A, Investor Relations.

Exhibit 18Exhibit 18 Market Valuation Indicators (as of March 28, 2002, unless noted otherwise)Petrobras (PBR)Pecom (PC)Market IndicatorsBeta 1 Year0.690.77Brazilian Sovereign Risk (bps)718Beta 3 Years0.940.87Argentine Sovereign Risk (bps)5,013Market price$26.47$8.12Treasury 10 Years5.40%Treasury 30 Years5.80%Source: Adapted by casewriter from Rodrigo Lopes , Dados Relatorio Petrobras, to Ricardo Reisen de Pinho , March 7, 2003, and March 13, 2003.

Exhibit 21Exhibit 21 Valuation Tables for Selected Companies (as of March 28, 2002)CompanyTickerPriceMarket CapEVEVEVPricePrice(US$)ReservesEBITDADebt Adjusted Cash FlowCash FlowEarnings20022001A2002E2003E2001A2002E2003E2001A2002E2003E2001A2002E2003ESupermajorsBPBP53.119810.46.98.16.298.37.110.27.37.31315.710.9Chevron Texaco aCVX90.398.875.15.9577.36.36.36.35.5101310.3Exxon MobilXOM43.8294.911.57.18.97.79.211.49.69.110.99.315.220.715.6Royal DutchRD54.3113.14.84.95.44.76.77.86.86.87.66.41213.710.6Shell TransportSC44.371.33.34.95.54.86.97.96.96.97.76.512.214.110.8Total Fina ElfTOT76.6101.89.15.75.956.97.36.57.26.66.11414.511.5Weighted Average b96.27.36.18.197.78.38.47.413.416.612.5MajorsOccidentalOXY29.210.96.84.85.74.85.26.25.34.154.48.511.89.9MurphyMUR48.82.26.93.66.33.93.753.72.83.42.47.721.26.7BGBRG22.315.71014.214.6918.614.211.720.97.66.220.99.78ENIE72.157.69.474.94.78.18.36.85.35.44.95.35.44.9Norsk HydroNHY47.912.36.94.333.317.716.914.73.93.72.73.93.72.7Conoco PhillipsCOP62.842.616.68.610.4516.319.810.946.95.18.814.510.2Repsol YPFREP12.715.54.76.63.13.75.25.45.53.14.53.83.14.53.8StatoilSTO7.817.154.52.52.62.22.92.33.85.34.13.85.34.1Weighted Average b9.376.34.69.810.67.85.65.74.77.38.96.7Emerging OilsLukoilLUKOY5911.11.13.84.534.65.43.63.84.5356.13.5MOLMOLHB4,950.001.7NA8.5NANA8.9NANA6.8NANA21.3NANASibneftSBKYY1783.46.3756.87.65.96.57.45.731.948.733YukosYUKOY12418.42.25.25.23.86.26.856.675.214.717.513.5SurgutSNGSRU11.4131.22.92.62.4NANANA5.14.64.1209.2189.3170.4PetroChinaPTR20.93.62.63.23.12.84.44.23.83.53.43.26.46.25.6SinopecSNP16.20.37.68.48.76.35.55.54.63.23.22.77.78.76.1PKNPKNPW18.71.9NA5.65.84.166.34.64.74.93.525.318.57.6Weighted Average b3,24.84.93.84.853.94.64.73.831.931.726.4PetrobrasPBR26.528.72.92.83.12.83.73.64.32.52.22.63.64.33.8Overall Weighted Average6.15.25.44.36.67.15.95.35.34.61415.412.3Source: Compiled and adapted from Alexandra Strommer, Muscle and Brains, J.P. Morgan Securities Inc., July 16, 2002, p. 14, and from Rodrigo Lopes , Dados Relatorio Petrobras, to Ricardo Reisen de Pinho , March 7, 2003, and March 13, 2003.aProven reserves for Chevron Texaco is the sum of the individual proven reserves reported by both Chevron and TexacobWeighted average by market capitalization