Jun 14, 2012

Brazil’s Cemig Bets On Shale Gas To Triple Fuel Sales

Cia Energetica de Minas Gerais, Brazil’s largest electricity company by market value, is betting shale gas will help it triple fuel sales by 2016.

The Belo Horizonte, Brazil-based company is seeking U.S. partners with experience in drilling shale gas to help develop four blocks in Minas Gerais state, according to Chief Financial Officer Luiz Fernando Rolla. The company, known as Cemig, completed two exploratory wells this year and plans to drill three more, according to its website.

Cia. Energetica de Minas Gerais Chief Financial Officer Luiz Fernando Rolla said, “The outlook for shale gas is very positiv.” Photographer: Dado Galdieri/Bloomberg

Cemig is investing in unconventional fuels as it seeks to boost sales from its gas unit to 3 million cubic meters a day by 2016 from an estimated 1.1 million cubic meters in 2012. A boom in shale may allow the U.S. to become a net exporter of natural gas by early next decade, while Argentina is seeking investors to help develop about 13 billion barrels of reserves.

“The outlook for shale gas is very positive,” Rolla said in an interview in London. “Natural gas is still very underdeveloped for Brazil and can be a great growth driver for the company.”

Cemig is interested in buying Vale SA’s natural-gas reservoirs to diversify its supplies for thermal plants from Petroleo Brasileiro SA (PETR4), Brazil’s state-controlled oil company, Rolla said in an interview last month. Vale, which has minority stakes in onshore and off-shore gas projects in Brazil, is selling stakes to focus on minerals and metals.

The power company’s clients include Vale, the world’s largest iron-ore miner, and ArcelorMittal, the world’s biggest steelmaker, according to data compiled by Bloomberg. (CMIG4)

Third Best

Cemig rose 37 percent this year, compared with a 1 percent decline for CPFL Energia SA (CPFE3) and a 28 percent drop for Centrais Eletricas Brasileiras SA (ELET6), and is the fifth-best performer in Brazil’s benchmark index after Cia de Saneamento Basico do Estado de Sao Paulo, Hypermarcas SA, Cielo SA and Ultrapar Participacoes SA.

Profit at Cemig’s gas unit has almost doubled in the past five years as the company seeks to diversify away from electricity. Earnings before interest, taxes, depreciation and amortization probably will rise to about 189 million reais in 2012, from 95 million in 2008, while profit is expected to climb to 127 million reais from 86 million in the period, according to a presentation on the company’s website.

Shale oil output has reversed decades-long declines in the U.S. Oil production last year was 15 percent higher than in 2008, when it touched a 62-year low. In Argentina, YPF SA, the country’s largest oil company, made its biggest oil discovery this year when it found at least 13 billion barrels of shale oil resources.

Economic Growth

Brazilian gas output, which reached 66.2 million cubic meters per day in March, increased 72 percent between 2001 and 2011, according to data from the country’s oil and gas regulator, known as ANP. Gas use has been driven by economic growth that has pulled more than 30 million people out of poverty.

Gas imports account for about 42 percent of Brazilian gas supplies, even as domestic output increased 72 percent in the last decade.

Cemig has expanded through at least 13 acquisitions in the past five years, including transmission company Transmissora Alianca de Energia Eletrica SA, known as Taesa, and distributor Light SA. The company’s success in executing mergers and acquisitions is a good signal for their expansion into gas, according to Filipe Lopes, an analyst at Agora Corretora.

‘Track Record’

“They have a good track record on their side after they bought Taesa and Light and turned in profits from the two business,” Lopes, who has a buy recommendation on the stock, said in a telephone interview from Rio de Janeiro yesterday.

While no companies have announced commercial shale gas production so far in Brazil, developing the reserves would help lower costs of the fuel in the country, according to Adriano Pires, head of the Rio de Janeiro-based Brazilian Center for Infrastructure.

“It would be an opportunity to have cheaper gas in Brazil,” Pires said in an interview yesterday from Rio. “Demand is huge. And Cemig is very well located, near Rio, Minas Gerais and Sao Paulo, to several companies that need gas. It makes a lot of sense to invest in shale gas.”

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

Tags Brazil Bloomberg Shale