OGX’s $2.56 billion of notes due 2018 rallied yesterday, after reaching a record-low of 57.2 cents on the dollar on April 18, as Folha de S. Paulo newspaper reported Batista is in talks to sell a 40 percent stake to OAO Lukoil, Russia’s second- largest producer. The bonds, the year’s worst-performing emerging-market securities with more than $500 million outstanding, fell last week by the most since they were sold in May 2011 as a slump in crude output in March intensified concern that Rio de Janeiro-based OGX is facing a cash crunch.
While OGX called the Lukoil speculation “groundless,” it came a week after a person with direct knowledge of the matter said Batista is trying to raise $1 billion by selling an oil- field stake to Malaysian state-owned producer Petroliam Nasional Bhd. Last month, OGX shut two of the three wells at its only active field, where output was already as little as 19 percent of original estimates. That helped erase a rally in OGX bonds from early March, when billionaire Andre Esteves’s Grupo BTG Pactual signed on as a strategic adviser.
“Where does OGX get more money if the sales to Petronas or Lukoil do not materialize?” Cornel Bruhin, a money manager at MainFirst Schweiz AG, which oversees $4.5 billion in assets, said in a telephone interview from Zurich. “The bonds might trade quite a bit lower in a few months. Even if sales are just delayed, there are not that many people out there that have much patience with Mr. Batista.”
OGX’s press office declined to comment on the performance of the company’s bonds. The 2018 securities yield 19.88 percent, almost triple the 6.87 percent for speculative-grade emerging market company debt globally, according to JPMorgan Chase & Co. index data.
OGX bonds and shares slumped to record lows last week as the company reported crude production fell 26 percent in March to 8,300 barrels a day. The company also said the two wells that were shut down would remain offline until as late as June to repair pumps damaged by unstable power supplies.
Speculation that OGX is on the verge of selling fields or a stake in the company itself helped the bonds rebound yesterday. The notes due 2018 rose after Folha reported that Lukoil is in advanced talks to buy a stake in OGX. Vladimir Semakov, a spokesman for the Moscow-based company, declined to comment when contacted by text message on April 21.
OGX is also negotiating a separate sale of a 40 percent interest in its Tubarao Martelo field to Petronas, as the Kuala Lumpur-based oil and natural gas producer is known, a person with direct knowledge of the matter said last week. Petronas said it hasn’t agreed to buy any oil blocks in Brazil in an e- mailed statement on April 17. OGX said the same day it doesn’t comment on market speculation while adding that it’s always looking for new business opportunities including possible sales of stakes in fields.
The company’s cash holdings fell 43 percent last year, according to data compiled by Bloomberg. Its $1.65 billion of cash and equivalents is set to run out by year-end at its current burn rate. Trailing 12-month free cash flow fell to negative $1.77 billion last year, the data show.
Batista said in October that he would pump $1 billion of his own money into OGX if the company needs additional capital and can’t find more favorable alternatives.
Batista’s fortune dropped $24.6 billion in the past year to $6.9 billion as the market value of his companies, which also include miner MMX Mineracao & Metalicos SA and logistics company LLX Logistica SA (LLXL3), plunged. As local lenders demand more collateral for loans, Batista must act to keep OGX afloat, according to Klaus Spielkamp, a fixed-income trader at Miami- based brokerage Bulltick Capital Markets.
“Investors aren’t betting on promises anymore,” Spielkamp said by telephone. “Confidence won’t come back easily. It will only come back with some measures effectively being taken.”
Moody’s Investors Service cut OGX’s ratings on April 9 to B2, five levels below investment grade, citing the lack of production and cash flows. OGX’s rating, on review for further downgrades, may be slashed further if it’s unable to build a stronger liquidity cushion in the next six months, Moody’s said.
OGX bonds are more likely to rally than fall in the coming months, according to Christopher Buck, a corporate credit analyst at Barclays Plc in New York. The company’s $1.06 billion of 2022 securities pay 17 percent, according to data compiled by Bloomberg.
“We continue to see possible funding options as a positive catalyst,” Buck wrote in an April 19 report. “OGX 2018s and 2022s now offer attractive carry, and given our view that funding is likely in the near term, investors will be able to capture this for the foreseeable future.”
Batista said March 23 on Twitter that people betting on declines at his companies will regret their wagers and that short sellers, who borrow securities and sell them in order to profit from buying them later at a lower price, will be “caught with their pants down.”
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell two basis points, or 0.02 percentage point, to 173 basis points at 12:55 p.m. in New York, according to JPMorgan Chase & Co.’s EMBI Global index.
The cost of protecting Brazilian bonds against default for five years fell two basis points to 117 basis points. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The real gained 0.1 percent to 2.0189 per dollar. Rate swaps due in January declined two basis points to 7.8 percent.
OGX’s 2018 notes have declined the most this year among 614 dollar and euro-denominated emerging-market corporate bonds with more than $500 million outstanding, according to Bank of America Corp.
While OGX still has funding sources to tap and time to raise the capital, production setbacks may continue to spur creditor losses, according to Bulltick’s Spielkamp.
“I’m afraid that when we see the production numbers for this month, and the capital necessity of the company for the year, the market will be stressed again,” Spielkamp said. “This can get worse before it gets better.”