OGX Petroleo & Gas Participacoes SA’s warning of a shutdown at its only producing crude oil wells is intensifying speculation that billionaire Eike Batista’s flagship company will have to restructure debt.
OGX shares fell 29 percent in Sao Paulo yesterday, erasing about $300 million of market value, while its bonds due 2018 dropped to a record low 19 cents on the dollar. The Rio de Janeiro-based producer said in a regulatory filing that it’s considering halting output at the Tubarao Azul field after a technical review and scrapped three other offshore projects.
Batista, whose resources and logistics startups made him the world’s eighth-richest person in March 2012, is scaling back projects and selling assets after net debt at his EBX Group Co. holding company almost doubled the combined market value of its units. OGX shares have slumped 90 percent in the past year after missed targets and production delays while Batista’s estimated fortune has shrunk by about $30 billion.
“You need to restructure the debt or bring cash into the group,” said Eric Conrads, who manages about $750 million of Latin American stocks at ING Investment Management in New York. “Its an unraveling process, stuff needs to happen or else it goes to zero.”
OGX told its shipbuilding sister company OSX Brasil SA (OSXB3) that it will pay the lease on one platform being built in Singapore until it’s sold or relocated and canceled orders for two other platforms and three drill ships.
As a result, OGX will pay $449 million compensation to OSX, or 39 percent of the oil’s producer’s cash at the end of the first quarter, according to data compiled by Bloomberg.
OGX’s total debt reached 7.99 billion reais in the first quarter from zero two years earlier, the data show. At today’s prices the company’s dollar-denominated bonds total $3.6 billion and its market value is $814 million. OGX is scheduled to make a $44 million interest payment on its 2022 dollar bonds on Oct. 1 and a $109 million payment on the 2018 bonds Dec. 1.
OGX’s $2.56 billion of 2018 bonds tumbled 13 cents on the dollar yesterday. OSX dollar bonds due 2015, which are backed by the OSX-3 platform, slid 3 cents to 85 cents.
Among Batista’s biggest creditors is Sao Paulo-based Itau Unibanco Holding SA, with about 5.5 billion reais ($2.5 billion) in loans outstanding, two people with direct knowledge of the matter said in March, asking not to be identified because the matter is private. Batista borrowed about 4.8 billion reais from Banco Bradesco SA and 1.6 billion reais from Grupo BTG Pactual, excluding a $1 billion credit line BTG provided that same month, the people said.
Bradesco, BTG and Itau BBA press officers declined to comment yesterday in e-mailed responses to questions.
Brazil’s development bank BNDES contracted 9.1 billion reais in loans to Batista companies from 2005 through 2012, BNDES said April 15. The state bank also holds a 10.3 percent stake in MPX Energia SA (MPXE3), 11.8 percent in the CCX Carvao da Colombia SA coal unit and a 33 percent in closely-held technology provider SIX, according to the statement.
“This is a very complex operation for creditors due to the amount involved and the number of EBX companies,” said Jorge Simino, chief investment officer at Funcesp, Brazil’s fourth-largest pension fund which holds shares in Batista companies including OGX.
The oil unit has the chance of exercising a $1 billion put option awarded by controlling stakeholder Batista to fund its investment program. The option, which expires April 30, is still a viable funding option, OGX’s press office said yesterday in an e-mailed response to questions. OGX hasn’t filed for bankruptcy protection, the company said.
OGX is also considering asking Brazil’s oil regulator to suspend the license to develop the Tubarao Tigre, Tubarao Gato and Tubarao Areia offshore fields, where the OSX-2 platform was to be deployed, according to yesterday’s filing. Development of the Tubarao Martelo field will continue.
“At this time, there doesn’t exist any type of technology available to make investments in this field financially viable with the aim of increasing its production,” OGX said in reference to Tubarao Azul.
OGX’s statement also triggered a share selloff among Batista’s logistics unit LLX Logistica SA and iron-ore producer MMX Mineracao (MMXM3) & Metalicos SA, wiping $538 million from the six publicly traded companies’ combined market value. Batista’s net worth slumped $250 million to $4.4 billion, according to the Bloomberg Billionaires Index. His fortune has declined the most since the index started in March 2012.
OGX’s main assets are in the offshore Campos basin, where Batista is producing at the Tubarao Azul field and preparing to start operations in partnership with Petroliam Nasional Bhd. at Tubarao Martelo later this year. A third development is the area formed by Tubarao Areia, Tubarao Gato and Tubarao Tigre, which OGX may give back. The company also owns blocks or stakes in the Espirito Santo and Santos basins, which aren’t producing.
On May 8, OGX sold a 40 percent stake in Martelo to Petronas for $850 million. OGX will receive $250 million once the deal is approved, another $500 million when production starts and $100 million after meeting three separate output targets.
Batista created OSX in 2010 to supply vessels to OGX. While the shipbuilder has sought to diversify its client base, it has yet to supply vessels to other customers. OSX, which rose as much as 5 percent yesterday before declining 5 percent to 1.33 real, is benefiting from OGX’s commitment to continue paying rental fees on its equipment despite the production failures, said Rogerio Freitas, who helps manage about $100 million at hedge fund Teorica Investimentos.
“OSX will receive leasing payments, and it can still sell the assets,” Freitas said by phone from Rio. “They have the capacity to survive independent of OGX.”
OGX’s decision to finance exploration and development of its main field without a production record resembles Houston-based ATP Oil & Gas Corp. (ATPAQ), a company that sought Chapter 11 protection in August after borrowing to finance deep-water exploration in the Gulf of Mexico and the North Sea that didn’t pan out, said Michael Wang, an analyst at IHS Herold in Norwalk, Connecticut.
“They financed the development with debt and are now in bankruptcy court, there are a lot of parallels between ATG and OGX,” Wang said. “OGX, had they only done equity finance, they wouldn’t have any problems. Now they have contracts with obligations to pay off the interest. They’re on the ropes.”
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