Batista OGX Profit Takes Longer on Production Woes
Brazilian billionaire Eike Batista may need to wait longer than he expected for OGX Petroleo e Gas Participacoes SA to make money after the oil company extended the time it will take to reach production targets.
OGX is pushing back targets under new management brought in after the company lost half of its value in less than two weeks in June. Chief Financial Officer Roberto Monteiro said OGX, based in Rio de Janeiro, will only reach output of 70,000 barrels a day, about enough to break even on cash flow, at some point after 2013. As recently as March the company planned to reach 150,000 barrels a day before the end of 2013.
OGX removed long-term production targets from presentations in June after its first two wells pumped about 5,000 barrels a day each, less than the company expected. Batista replaced four top executives, including Chief Executive Officer Paulo Mendonca, after a June 26 reduction in production goals caused OGX to slump 40 percent in two days. The head of strategic alliances also left and hasn’t been replaced.
“We’re going to be spending and decreasing our cash position over time,” Monteiro said in an interview at OGX’s downtown Rio offices yesterday. “When we start producing something around 70,000 barrels a day we will have a break even. This is why we don’t see ourselves returning to the market.”
The company had $2.9 billion in cash at the end of the second quarter. It pumped 10,600 barrels a day in August at its first two wells and will add a third before the end of the year. OGX plans to install two additional production vessels in late 2013 at the Campos Basin and will gradually increase output. Each vessel, known as an FPSO, has an installed capacity of 100,000 barrels a day.
Worst Bovespa Stock
The timing of when OGX reaches 70,000 barrels a day depends on how fast it connects production wells to the new equipment, he said.
OGX is the worst-performing stock in the Brazilian benchmark Bovespa index this year after falling 55 percent. Petroleo Brasileiro SA (PETR4), the state-controlled oil producer, dropped 4.2 percent while the Bovespa index gained 0.2 percent. HRT Participacoes em Petroleo SA, a pre-operational oil company exploring in Brazil’s Amazon that is not a member of the Bovespa index, slumped 61 percent after it disappointed investors by only finding natural gas and no oil.
“They are more conservative so they don’t create very optimist market expectations,” Erick Scott Hood, an analyst at SLW Corretora, said by telephone from Sao Paulo. “They still have the big challenge of developing the exploration campaign and trying to fulfill the schedule,”
OGX, which went public in 2008, is the main pillar in Batista’s empire of interlinked oil, mining, shipbuilding and logistics companies and propelled him to become Brazil’s richest man. OGX rents its production vessels from shipbuilder OSX Brasil SA (OSXB3) and will process and ship oil from a port owned by LLX Logistica SA. (LLXL3) All his companies end in X to represent the multiplication of wealth, according to Batista.
The plunge in OGX and subsequent losses in his other companies knocked Batista off the list of the world’s top richest people. Batista, whose fortune peaked at $34.5 billion in March as the eighth largest, is now worth $20.2 billion, making him number 27 in the Bloomberg Billionaire index.
Of the 18 analysts who rate OGX, nine have buy recommendations, seven have hold recommendations and two say sell.
The lower production rates at each well don’t reduce the total amount of oil the company can extract from below the seabed, Monteiro said. It will take the company longer to produce the oil from a larger number of wells, and producing at a slower pace will guarantee oil doesn’t get stranded in the reservoir, he said.
“The name of the game is recovery factor,” Monteiro said. “This is how we maximize the value of the company, not cash flow for tomorrow.”