Fitch Affirms OGX's IDRs at 'B+'; Bonds at 'B+/RR4'

  Fitch Affirms OGX's IDRs at 'B+'; Bonds at 'B+/RR4'  Business Wire  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 basins.  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 expectations.  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 regarding reserves.  Company Profile  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 ''. 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).  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