Fitch Affirms OGX's IDRs at 'B+'; Bonds at 'B+/RR4'
BUENOS AIRES, Argentina -- May 15, 2012
Fitch Ratings has affirmed OGX Petroleo e Gas Participacoes S.A.'s (OGX)
foreign and local currency Issuer Default Rating (IDR) at 'B+' and its
long-term national scale rating at 'BBB'. Fitch has also affirmed the rating
of its USD2.6 billion and USD1.1 billion notes at 'B+/RR4'. OGX's wholly owned
subsidiary, OGX AUSTRIA GMBH, is the issuer of both notes. These notes are
unconditionally and irrevocably guaranteed by OGX, OGX Petroleo e Gas Ltda.
and OGX Campos Petroleo e Gas S.A.
The Rating Outlook is Stable.
OGX's ratings reflect the company's sizable and diversified oil and gas
resources, its experienced management team, and its ability to execute the
start-up of production from its shallow-water Campos blocks using standard and
proven technology. Primary concerns include the potential for a delay in
incorporating proven reserves, unforeseen production delays that could result
from delays in critical equipment delivery and/or lower-than-expected ramp-up
of production volumes, and exposure to contracted yet unlocked leasing fees
for key production equipment. These factors could result in the need for
additional financing for OGX over the medium term. Initially, production risk
is mitigated to some extent as key equipment has been secured and procurement
for additional equipment to meet production targets is in an advanced stage.
OGX is in the production start-up phase of the Campos basin - Waimea Complex,
whose first oil was delivered on Jan. 31, 2012 through an extended well test
(EWT). The initial production volume of up to 1.2 million barrels was sold to
Shell in two shipments, at a USD5.00 discount to Brent. The declaration of
commerciality for Waimea by the Brazilian National Oil Agency (ANP) is
expected during the first half of 2012, following the presentation of such
request to the ANP in the coming weeks.
Production from Waimea was initially expected for October 2011, but production
still began within Fitch's expectations. The delay was attributable to a
combination of delays by the IBAMA to grant permission for the installation of
the equipment and development of the field, and adverse weather conditions.
OGX expects production volume at its first well to stabilize at approximately
10,000 to 13,000 barrels per day (bpd). After the declaration of commerciality
for Waimea, production volume is expected to ramp up to 40,000 bpd following
the connection of two additional horizontal wells during the second half of
2012 and possibly a fourth well.
The company expects production to begin in a second area in Campos called
Waikiki in the second half of 2013. By 2013, the company expects to have
approximately 11 or 12 horizontal production wells, each producing
approximately 10,000-20,000 barrels of oil equivalent per day (boe/d). OGX has
secured the critical equipment needed, including six offshore rigs under
contract and three floating, production, storage and off-loading facilities
(FPSOs) to meet these goals. The first FPSO has been connected to Waimea's
first producing well. The two additional FPSOs, OSX-2 and OSX-3, are being
constructed in Singapore and are expected to start operations in the second
half of 2013. OSX-2 will be installed in the Waimea Complex, and OSX-3 will be
installed in Waikiki.
During the first two years, OGX will use three FPSOs (OSX-1, OSX-2 and OSX-3),
and will replace the well head platforms (WHPs) with more costly subsea
installations, allowing OGX to still meet its targeted production target by
year end 2013. The construction of two WHPs by Techint, in Brazil, is delayed
and has resulted in a modification to the original investment plan with a
moderate increase in total investment of approximately USD240 million. To
achieve the original targeted production volumes on time, by year end 2013,
the company will replace some of the wells completed on top of the WHPs with
more costly subsea installations.
While unproven production volumes and the start-up phase of oil production
greatly add to OGX's business risk, the company's initial drilling campaign
was highly successful and was focused on several of the Campos basin blocks.
OGX's first drill stem test (DST) in the Santos basin was successful and
indicated the presence of condensates that were not originally envisioned. The
company plans to evaluate different alternatives to monetize the condensates
for a potential positive impact on OGX's long-term cash flow, although it is
difficult to quantify at this stage. In addition, the company recently
confirmed the existence of a pre-salt reservoir in the shallow waters of the
Santos basin, which further highlights the potential of this area. Such
exploration will require additional capex in 2012.
Thus far, the exploratory campaign in the Espirito Santo basin was
unsuccessful, with two dry wells, but OGX estimates there is potential in
other parts of this area. The company also began seismic shooting of its
Colombian blocks. Following the completion of 83 exploration wells over the
last four years, the overall success rate has been approximately 85% in all
OGX has a very aggressive growth strategy that envisions growing production
from 10,000 to 13,000 bpd today to over 730 thousand boe/d in approximately
five years. This growth plan will require large capital investments to bring
production on line. OGX's total investment program is sizable, ranging from
USD3.5 billion to USD4.2 billion between 2012 and 2013. In its base case
scenario, Fitch expects OGX to report negative free cash flow over the next
three years. Future investment activities will be financed with USD3 billion
of liquidity as of December 2011, USD0.3 billion from OGX Maranhao financing
(concluded in January 2012), plus proceeds from the recent USD1.1 billion debt
issuance. The company's initial exploration, development and production
activities have been fully financed with the proceeds from two equity
issuances in 2007 and 2008 that totaled USD5.4 billion, and proceeds from a
USD2.6 billion debt issuance in June 2011.
As of May 2012, OGX's pro forma debt was USD3.9 billion and includes the
USD2.6 billion bond issued last June, USD320 million of OGX Maranhao financing
and USD 1.1 billion recently issued. Such debt level is somewhat higher than
initially anticipated by the company for 2012, but is within Fitch's
conservative base case scenario. The incremental debt is related to additional
capex as a result of changes in the Waimea and Waikiki ramp-up strategy, and
the potential to appraise Santos Basin shallow-water pre-salt discoveries
while maintaining a cash cushion. Such deviation from the initial company's
projections was already imbedded in Fitch's current ratings.
Fitch's net adjusted debt for operating leases will increase total adjusted
obligations to slightly greater than USD10 billion by 2016. Leverage based on
debt to proven reserves is expected to be below USD3 per barrel assuming 4
billion boe are proved out over the next few years. These estimates may vary
depending on eventual production rates/levels, the level of proven reserves,
and ultimately, crude prices.
Fitch estimates that as production ramps through 2013, leverage as measured by
total adjusted debt to EBITDA, will decrease from non-meaningful levels today
(no operating cash flow) to levels in the high single digits. Fitch expects
leverage should substantially decline to below 4.0x after adjusting debt for
operating leases in 2014 and 2015 as production comes on line and operating
cash flow increases. Fitch also expects the vast majority of incremental total
adjusted debt will be associated with operating leases for production
equipment with affiliate company, OSX. Fitch projects EBITDA will grow to
between USD6 billion-USD8 billion by 2015 using Fitch's published mid-cycle
price deck and by applying significant discounts to management's production
targets; Fitch's base case is significantly lower than management's
Catalysts for a negative rating action include a significant delay in bringing
production online, coupled with lower than expected discovery levels and
incorporating reserves, which could result in increased funding needs and a
deterioration in OGX's credit quality. A positive rating action could result
from satisfactory production volumes, coupled with lower uncertainties
OGX is a Brazilian Oil and Gas company created in 2007, 61.2% owned by EBX
Group. OGX has a portfolio of 35 blocks, of which 30 are located in Brazil (22
are offshore) and five onshore blocks are in Colombia, covering an area of
44,000 square kilometers. In Brazil, OGX's blocks are located in the Campos,
Santos, Espirito Santo, Para-Maranhao and Parnaiba Basins - covering an area
of 31,500 square kilometers.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Rating Oil and Gas Exploration and Production Companies' (April 5, 2011).
Applicable Criteria and Related Research:
Rating Oil and Gas Exploration and Production Companies
Corporate Rating Methodology
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