HRT Joins OGX in Free-Fall as Jungle Bet Sours: Corporate Brazil

HRT Participacoes em Petroleo SA is joining energy startup OGX Petroleo & Gas Participacoes SA as the worst-performing oil stocks in emerging markets after its bet on unexplored fields in the Amazon jungle and Africa soured.

HRT’s 65 percent plunge since the start of May makes it the worst performer among the 111 biggest oil and gas explorers based in emerging markets after OGX, which has tumbled 74 percent, data compiled by Bloomberg show. Rio de Janeiro-based HRT fell to a record low this week after it abandoned two dry wells in Namibia and another in north Brazil since May.

Chief Executive Officer Milton Romeu Franke, who took over in May, is seeking to undo his predecessor’s strategy of betting on unproven deposits by focusing on fields that can generate cash now. While exuberance over Petroleo Brasileiro SA’s 2007 discovery of the Americas’ biggest oil field in three decades buoyed startups and helped Brazilian oil companies raise $77 billion in share sales since 2008, investors are now dumping the stocks as companies struggle to deliver on output promises.

“What happened here is that Brazil didn’t have any factual experience with junior companies,” said Lucas Brendler, who helps manage about 4 billion reais ($1.8 billion) at Geracao Futuro Corretora in Porto Alegre, Brazil. “Analysts and investors were used to big assets with a structured company that stood on its own feet and had proven reserves. You didn’t have the experience to price a junior asset.”

Amazon Bet

As Petrobras and companies including Repsol SA, BG Group Plc and Galp Energia SGPS SA flocked to the deep-water fields off Brazil’s coast, where the state-run producer discovered reserves holding at least 50 billion barrels, HRT founder Marcio Mello eschewed the trend and bet on untested deposits in the Amazon and Namibia instead. In a 2011 interview, he called the Amazon “one of the last frontiers in the whole world where you can find giant and super giant oil and gas fields.”

HRT, which declined to comment for this article in an e-mailed statement, said July 19 that its second well in Namibia was dry, prompting Franke to announce it will sell assets including drilling rigs and helicopters to strengthen the company’s cash position.

The setback follows problems at Rio de Janeiro-based OGX, the oil company controlled by billionaire Eike Batista, which has been in a free-fall after saying July 1 that it may close its only producing oilfield next year and won’t start production at three others.

Lessons Learned

Fellow startup QGEP Participacoes SA (QGEP3) has also announced at least one dry well in Brazil’s so-called pre-salt region. The stock has declined 9.3 percent this year. Press officials for OGX didn’t respond to questions sent by e-mail. QGEP declined to comment.

HRT may be in a good position to survive until it discovers oil or announces a gas project because it has no debt, Banco Santander SA analysts Christian Audi and Vicente Falanga Neto said in a note to client yesterday.

Net debt at OGX at the end of the first quarter was 5.7 billion reais, compared with a market value of 1.8 billion reais yesterday, according to data compiled by Bloomberg.

HRT’s failure means it must decide whether to continue spending money on Namibia or further adjust its strategy, according to Marcus Sequeira, an analyst at Deutsche Bank AG.

HRT in May said it bought 60 percent of the offshore Polvo oil field in Campos, Brazil’s most productive basin, from BP Plc for $135 million. The field gives HRT cash flow after it posted a 98 million-real loss before interest, taxes, depreciation and amortization in the first quarter.

Investors probably will be reluctant to invest in Brazilian startups going forward following the under-performances in recent years, Sequeira said.

“Everybody learned about the risks of juniors,” he said by telephone from New York. “There’s been a lesson.”

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editors responsible for this story: Jessica Brice at jbrice1@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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