Petrobras Energia Participaciones S.A.

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Petrobras Energia Participaciones S.A.

Maipu 1
Buenos Aires, C.F. C1084ABA
Argentina
Telephone: (54) (11) 4344-6000
Fax: (54) (11) 4344-6315
Web site: http://www.petrobrasenergia.com

Public Company
Incorporated: 1947 as Compania Naviera Perez Companc S.A.C.F.I.M.F.A.
Employees: 3,334
Sales: ARS 6.97 billion ($2.39 billion) (2004)
Stock Exchanges: Buenos Aires New York
Ticker Symbol: PC
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 221111 Hydroelectric Power Generation; 221112 Fossil Fuel Electric Power Generation; 221122 Electric Power Distribution; 221210 Natural Gas Distribution; 324110 Petroleum Refineries; 325110 Petrochemical Manufacturing; 325212 Synthetic Rubber Manufacturing; 325311 Nitrogenous Fertilizer Manufacturing; 447190 Other Gasoline Stations; 551112 Offices of Other Holding Companies

Petrobras Energia Participaciones S.A. is the holding company for Petrobras Energia S.A., an integrated energy company that is the second largest petroleum and natural gas producer in Argentina and also maintains facilities for the exploration and production of oil and natural gas in Bolivia, Ecuador, Peru, and Venezuela. It also is engaged in refining crude oil, producing petrochemicals, and—by holding minority stakes in other Argentine enterprises—in generating, transmitting, and distributing electricity and in transporting and distributing natural gas. In addition, the company owns a network of gasoline service stations in Argentina. Based in Buenos Aires, Petrobras Energia Participaciones is majority-owned by Petroleo Brasileira S.A. (Petrobras), Brazil's largest company.

Emerging Conglomerate: 1946–89

Jorge Perez Companc was a doctor and his brother Carlos was a lawyer when they began their business careers in 1946 by purchasing four surplus U.S. merchant vessels that had been used in World War II and founding the Argentine shipping company Compania Naviera Perez Companc to haul equipment and supplies for Yacimientos Petroliferos Fiscales (later YPF S.A.), the giant state-owned petroleum company. These shallow-draft 100-meter-long barges were well suited for duty in the brothers' native Patagonia, with its lack of developed harbors. They also had inherited thousands of acres of land in southern Argentina and began ranching and farming activities in 1952, a year after establishing the insurance company La Patagonia. Two years later they founded a travel agency, Turismo Pecom. In 1956 they also acquired forest land in northeastern Argentina for timber exploitation and in that year began selling shares in their budding conglomerate on the Bolsa de Comercio de Buenos Aires. Perez Companc, or Pecom for short, had about 60 employees and annual revenue of perhaps $10 million in 1958, the year before Jorge died.

Perez Companc entered the energy business in 1960, when it began servicing oil wells. It expanded its scope during the decade to include drilling oil and gas wells as a subcontractor for YPF and won its first production contract in 1964. Four years later YPF awarded it a 15-year contract to explore and develop what proved its first significant oilfield, Entre Lomas. The company's maritime operations were gradually discontinued and replaced by oil-related activities. In 1968 Pecom had about $30 million in annual sales, but the Entre Lomas field soon tripled its revenue.

Perez Companc established, in 1971, a company to process lead and tin. The following year it won its first oil production contract without partners. But its biggest coup of the decade was its purchase, in 1976, of the majority holding in the big public works contractor Sociedad Anonimo de Electricidad (SADE) for only $15 million from General Electric Co., which was anxious to leave violence-wracked Argentina, where urban guerrillas were kidnapping business executives for ransom. Here, as in the case of YPF, Perez Companc's ties to the government served it well, for SADE won many contracts to build power plants and roads. SADE also allied itself with the Japanese firm NEC in Pecom Nec S.A., a joint venture producing electrical machinery and communications equipment.

Energy-Oriented Powerhouse in the 1990s

In spite of its far-flung activities, Perez Companc was not yet big enough to attract major attention in Argentina. In 1975 it ranked only 109th in sales. By 1980, however, it ranked 50th, and in 1985 it rose to 33rd. By 1983 Pecom had 48 enterprises under its banner, and during the latter years of the decade, when company valuations were low, it had the funds to buy, on average, an enterprise per month. With the election of Carlos Menem to the presidency in 1989, an era of privatizing state enterprises began, and Perez Companc was one of the chief beneficiaries, investing $980 million between 1990 and 1992 for stakes in Argentina's two major telephone companies, road and rail concessions, oil and gas fields and oil refineries, a gas pipeline, an electricity generating station, and electricity and gas distributors. In 1991, when the conglomerate had divisions for petroleum, petrochemicals, agroindustry, energy, communications and services, and mining, it employed about 10,000 people and had sales of $705 million and profits of $72 million.

These sums included only the public company, however, and counting nonconsolidated enterprises such as La Patagonia, Banco Rio de la Plata S.A. (a private bank acquired in 1968), and large agroindustrial enterprises, all managed directly by the Perez Companc family, it was probable that sales came to $1.5 billion a year. Banco Rio, which had grown to be Argentina's largest private bank, had raised $225 million in New York and had used some of these funds to buy parts of privatized enterprises for Perez Companc, such as the giant telephone companies Telecom Argentina S.A. and Telefonica de Argentina S.A., in which it held minority stakes in the controlling consortiums.

But Pecom's oil and gas holdings constituted its chief activity, accounting for more than half of the company's sales. Pecom had ranked only sixth among oil companies in sales in 1990, but in that year it was awarded part of concessions to operate Puerto Hernandez, the second-ranking oilfield in Argentina, and the Faro Virgenes and Santa Cruz II areas in the Austral basin, Argentina's most important area of oil and gas production. By 1992 Pecom was second only to YPF in national crude oil production.

With headquarters in a Buenos Aires high-rise office building close to the seat of government, the Perez Companc interests, although far-ranging, were closely supervised by an experienced management team of no more than 15 people. "We were working until 10 at night every weekday and 40 percent on weekends," the principal manager of the international division told Maria Eugenia Estenssoro of the business magazine Mercado in 1992. Jorge Fernandez, administrative director of Banco Rio, was in the habit of working until three in the morning and was said to have married his secretary "because she was the only woman that he had occasion to meet." There were two general managers: Ernesto Casabal for finance, and Oscar Vicente for other matters, but especially petroleum.

These two had been appointed by Carlos Perez Companc. Neither he nor the deceased Jorge left children. After Carlos' death in 1977, the presidency of the group passed to his much-younger adopted brother, Jorge Gregorio (Goyo) Perez Companc. A poll of influential Argentines in 1992 rated him the second most powerful person in the nation, surpassed only by Menem himself. Wealthy but austere, he could be seen until the 1990s driving a Ford Falcon. His piety was reflected in an enormous image of the Virgin Mary in the company's reception room and a stained-glass window image of Our Lady of Patagonia on the floor that housed the chief officers. The company was noted for its Japanese-style human resources management, valuing loyalty above all else and in return offering an unwritten promise of secure employment for life.

By mid-1993 Perez Companc had annual sales of $925 million and total assets, counting nonconsolidated holdings, of more than $2 billion. These holdings, direct or indirect, included, aside from all of SADE, half of Pecom Nec, and parts of Telecom and Telefonica; 74 percent of Quitral-Co S.A.I.C., its oil services subsidiary; 17.5 percent of Transportadora de Gas del Sur S.A and MetroGas S.A., privatized gas pipelines and distributors; one-third of Petroquimicas Argentinas S.A. (PASA) and 40 percent of Petroquimica Cuyo S.A., both big petrochemical producers; one-sixth of the large privatized electricity-generating company Empresa Distribuidora Sur S.A. (Edesur); 28 percent of Refineria del Norte S.A., a privatized oil refinery; 57.5 percent of newly established Refineria San Lorenzo; and all of Alto Palermo S.A., a big real estate development firm that included half-ownership of one of Buenos Aires' main shopping centers. Perez Companc had also acquired in 1990 a 3 percent stake in YPF, making it for a time the privatized oil giant's principal shareholder. The company purchased the rest of PASA in 1994. In 1995 Forbes ranked the Perez Companc family as the richest in Argentina, holding about 55 percent of Perez Companc S.A. ("Compania Naviera" was dropped from the company name that year). At the same time, however, Pecom was divesting itself of enterprises outside its core businesses of energy, communications, and construction.

Company Perspectives:

We strive to create the highest possible value for our shareholders, customers, employees, investors, suppliers and for the communities in which our business activities take place. We will be a leading, renowned, integrated energy company in Latin America, working toward international expansion.

Perez Companc celebrated its 50th anniversary in 1996 with annual consolidated sales of $1.41 billion and an estimated market value of $4.68 billion. Its net income had grown from $50 million in 1990 to $328 million in 1996. Petroleum and gas sales accounted for 69 percent of the total, with the company still the second largest oil producer and third largest in natural gas. By now operations in this field had spread to Bolivia (1989), Venezuela (1994), and Peru (1996). Its policy of vertical integration in energy extended to pipelines, power plants, and the transmission of electricity along its own high-capacity lines. Communications was now being downgraded, with the company having divested itself of its interest in Telefonica and being on the way to do the same with its Telecom holding, a process completed in 1999. Also sold were Quitral (1996), Banco Rio (1997 to 2000), Pecom Nec (1997), Alto Palermo (1997), SADE (1999), and the holdings in YPF (1999). These sales raised $1.1 billion. The number of divisions was reduced from eight to five.

There were a number of other developments. Casabal was removed from his post in early 1997. Near the end of that year Gregorio Perez Companc, flanked by his wife and eight children—rather than, as traditional, high company executives—told the 3,000 employees assembled that "the next 50 years of the company will be in the hands of my family." In 1999 he indicated that the family's future might lie outside the company when one of Argentina's largest food companies, Molinas de la Plata S.A., was purchased for $377 million—not by Perez Companc S.A. but by a family group based in the Cayman Islands.

Shares of Perez Companc had increased one hundredfold in value between 1982 and 1997. On the other hand profits had stagnated since 1996, the level of company debt was beginning to raise attention, and the increasing size of the main enterprises in the world energy field meant it would be difficult for Pecom to continue competing. Moreover, oil production in Argentina was diminishing with the slow exhaustion of exploitable deposits of hydrocarbons, and the cost of financing expansion to other South American countries had raised Pecom's debt to $1.5 billion.

Transition to the 21st Century

Perez Companc was reorganized in 2000 to give the family's 58 percent holding a greater share—80 percent—of the voting power and hence fend off any hostile bid for control that might occur after selling more shares of stock. Perez Companc became the controlling company of Pecom Energia, S.A., which had 35 subsidiaries and minority interests in 25 other companies. Of Perez Companc's $1.34 billion in 1999 revenue, exploration and production of oil and gas, commercialization and transport of hydrocarbons, refining and petrochemicals, and electricity accounted for all but $60 million. In 2000 the company acquired the remainder of Refineria San Lorenzo, and with it full control of a network of 75 service stations. It also had begun exploratory drilling in Ecuador and had begun work on styrene and polystyrene plants in Brazil. The nonenergy assets represented Perez Companc's remaining company holdings in agriculture, livestock raising, forestry, and mining. The latter included a Patagonian venture with U.S. partners that, in 1998, after ten years and $60 million in investment, uncovered a medium-sized gold-and-silver deposit.

By the end of 2001 the economic recession in Argentina that had begun in 1998 had so deepened that the government was unable to make payments on its debts and thereby maintain the peso at parity with the U.S. dollar. The subsequent devaluation left Perez Companc in a difficult position; more than half of its revenue was in the form of pesos that were worth only about one-third their former value, but it had to make payments on about $1.6 billion in dollar-denominated long-term debt. In October 2002 the Perez Companc family sold its stock in the company to Petroleo Brasileira S.A. (Petrobras) for $1.03 billion in cash and bonds. Perez Companc's agricultural, livestock-raising, forestry, and mining interests were sold to companies representing the Perez Companc family for about $190 million.

Petrobras, the world's 12th largest oil and gas producer, had entered Argentina in 1993 and was active in the exploration, production, transport, industrialization, and commercialization of petroleum. In 2001 it acquired control of the Argentine oil refining and distribution company Eg3 S.A., including a network of almost 700 service stations and, in 2002, the oil and gas producer Petrolera Santa Fe S.R.L. Perez Companc S.A. was renamed Petrobras Energia Participaciones S.A. in 2003, and its subsidiary Pecom Energia S.A. was renamed Petrobras Energia S.A. Petrobras Energia absorbed Eg3 and Petrolera Santa Fe, as well as the parent Brazilian company's prior Argentine subsidiary, Petrobras Argentina S.A., in 2004.

Petrobras Energia, in 2003, had interests in 24 oilfields, of which 17 were producing oil and gas fields. The ten producing fields in Argentina were concentrated in the Neuquen and Austral basins of Patagonia and accounted for 4.6 and 3.9 percent, respectively, of national production. About 60 percent of the company's reserves were now outside Argentina. Of the seven producing oil and gas fields outside the country, four were in Venezuela and one each was in Bolivia, Ecuador, and Peru. The company had an Argentine refinery in San Lorenzo, Santa Fe, and shared with parent Petrobras two refineries in Bolivia. It maintained, in Argentina and Brazil, petrochemical plants producing styrene, polystyrene, polypropylene, fertilizers, and synthetic rubber. Innova S.A., the company's Brazilian subsidiary for petrochemicals, was the nation's largest producer of styrene. Petrobras Energia also owned two Argentine power plants, held 70 percent of Enecor S.A., a transmission company, and had minority interests in others, including Edesur S.A., Transener S.A., and Yacylec S.A. Other minority holdings included Petroquimica Cuyo S.A., Refineria del Norte, and Transportadora de Gas del Sur S.A. When Petrobras Energia absorbed Eg3 in 2004, it added Eg3's Bahia Blanca, Buenos Aires, refinery to its holdings. It also opened an ethylene plant in San Lorenzo in 2004.

Key Dates:

1946:: The Argentine shipping firm Compania Naviera Perez Companc is founded.
1960:: Perez Companc enters the energy business by servicing oil wells.
1972:: The company wins its first contract to extract petroleum without partners.
1983:: Perez Companc (Pecom) is a conglomerate composed of 48 enterprises.
1990–92:: Perez Companc invests nearly $1 billion for stakes in privatized state-owned enterprises.
1996:: In its 50th year, Perez Companc has consolidated sales of $1.41 billion.
1999:: Concentrating on energy, Perez Companc has sold $1.1 billion worth of other enterprises.
2003:: The Perez Companc family sells its stock to Petroleo Brasileira (Petrobras).

Petrobras Energia had net sales of ARS 6.97 billion ($2.39 billion) in 2004, of which (excluding minority interests) oil and gas accounted for about half and refining and petrochemicals for about one-quarter each. Oil and gas accounted for 71 percent of gross profits in 2003, excluding minority interests. The company's dollar-denominated debt came to ARS 8.3 billion ($2.62 billion) at the end of 2003.

Principal Subsidiaries

Enecor S.A. (70%); Innova S.A. (Brazil); Petrobras Bolivia International S.A. (Bolivia); Petrobras Energia S.A.; Petrobras Energia Ecuador S.A. (Cayman Islands); Petrobras Energia Peru S.A. (Peru); Petrobras Energia Venezuela S.A. (Venezuela).

Principal Divisions

Electricity; Hydrocarbon Marketing and Transport; Oil and Gas; Petrochemicals; Refining.

Principal Competitors

BHP Petroleum (Argentina) Inc.; Dow Brasil S.A. (Brazil); Dow Quimica Argentina S.A.; Esso Petrolera Argentina S.R.L.; Petrokea S.A.; Profertil S.A.; Shell Argentina; Sol Petroleo; YPF S.A.