OGX Petroleo & Gas Participacoes SA (OGXP3), which has the worst-performing bonds in emerging markets this year, holds off-balance-sheet obligations tied to its sister-company that could swell liabilities by as much as 39 percent in the event of insolvency, according to Covenant Review.
While parent EBX Group Co. said in March its units have the “necessary funding established for the coming years” and OGX announced yesterday it raised $850 million selling an oilfield stake to Malaysia’s Petroliam Nasional Bhd., the amount would only extend cash reserves by six months, until mid-2014, at OGX’s current burn rate, data compiled by Bloomberg show. Yields on $2.56 billion of OGX bonds due 2018 almost doubled this year to 20.49 percent yesterday, the highest for notes sharing its B grade from Fitch Ratings, after output setbacks left it short of targets.
Creditors of OSX Brasil SA (OSXB3), which billionaire Eike Batista created to build and rent ships to OGX, can take possession of the vessels and demand the oil company repay debt used to finance their construction if the producer becomes insolvent, according to a private placement memorandum OSX issued with its March 2012 bond sale. OGX could then be on the hook for the $500 million of OSX bonds and $1.3 billion of syndicated loans in a bankruptcy, said Covenant Review, the credit-research firm that specializes in analyzing safeguards in bond contracts.
“If you look at the OSX bond offering document, it doesn’t say the bonds are guaranteed by OGX, but it’s effectively the same thing as a guarantee,” Adam Cohen, the founder of Covenant Review, said in a telephone interview from New York. “Overall, this means that the amount of claims against OGX in a bankruptcy may be more than the market realizes.”
OGX’s press office said in an e-mailed response to questions that the ships it charters from OSX shouldn’t be considered debt, and said that its assets and liabilities are audited and released regularly.
“The contract between OSX and OGX includes the leasing of exploration and production units,” OSX said in an e-mailed statement. “The assets and liabilities relative to the platforms belong to OSX.”
While one of the three ships financed by the bonds and loans has been put into service, the two other vessels are scheduled to be delivered in the third quarter. Language in the bond memorandum indicates all the debt have the same provisions allowing investors to seek immediate repayment if OGX is insolvent, according to Cohen.
Creditors could seize the ships that guarantee the debts, although it’s unlikely they’re worth enough to pay off the obligations and investors would probably also sue OGX for full repayment at the same time, Cohen said.
Rio de Janeiro-based OGX listed total liabilities of $4.58 billion at the end of last year.
Batista, 56, has seen $5.4 billion of his personal wealth wiped out this year as investor confidence in the ability of his companies to deliver profits deteriorated.
He pledged to generate profits at OGX, which had no track record of sales or production, by joining state-controlled Petroleo Brasileiro SA in developing the world’s largest crude oil discoveries in the past decade.
OGX’s cash holdings fell 43 percent last year, according to data compiled by Bloomberg. Excluding the $850 million stake sale, its $1.65 billion of cash and equivalents would run out by year-end at its current burn rate, according to fourth-quarter earnings data.
OGX said yesterday that offshore oil output plunged 84 percent from February to 1,800 barrels a day in April after it halted two of three wells at the Tubarao Azul field. OGX plans to restart one well this month and another in June.
Most investors in OGX probably aren’t aware of the obligations tied to OSX, creating further concern about a company that’s already struggling to generate sufficient cash, according to Luiz Campos, a Sao Paulo-based money manager at Dinosaur Merchant Bank.
“I didn’t know about this, but if it’s true, I think we’ll start talking about insolvency in a more aggressive way,” Campos said in a telephone interview. “If that’s the case, OGX’s current risk is very poorly measured.”
OGX’s sale of a stake in its Tubarao Martelo oil block in Brazil’s Campos Basin should “buy them some time” as the company seeks to bolster investor confidence amid concern over missed financial and production targets, said Revisson Bonfim, an analyst at Espirito Santo Investment Bank in New York.
Malaysia’s state-owned producer known as Petronas agreed to buy a 40 percent stake in two blocks in the offshore Tubarao Martelo field located in the Campos Basin, according to an e-mailed statement from Petronas.
“It’s certainly a positive as it would increase their liquidity and bring a very strong partner into their projects, which could lead to other opportunities as well,” Bonfim said in a telephone interview.
Batista also 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.
OGX’s 2018 bonds rallied to a three-week high today, climbing 1.72 cent to 65 cents on the dollar as yields fell to 19.76 percent as of 3:22 p.m. in New York.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries rose three basis points, or 0.03 percentage point, to 166 basis points, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years climbed three basis points to 110 basis points, according to data compiled by Bloomberg. 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 strengthened 0.2 percent to 2.0040 per U.S. dollar. Yields on interest-rate futures contracts due in January 2014 rose one basis point to 7.86 percent.
OGX’s 2018 and 2022 notes are the worst-performing emerging-market bonds this year with at least $500 million outstanding, according to Bank of America Corp.
Investors in OGX also need to consider that future vessels ordered by the oil producer may subject it to similar guarantees, according to Covenant Review’s Cohen.
Money managers should “start taking a closer look at where assets are scattered around the capital structure and unraveling the guarantees and collateral,” Cohen said. “It’s a difficult exercise.”