OGX Petroleo (OGXP3) & Gas Participacoes SA’s decision to abandon nine oil exploration licenses is underscoring former billionaire Eike Batista’s race to halt a cash drain and focus on restructuring $3.6 billion in bonds.
Batista agreed to pay 3.4 million reais ($1.4 million) to return the licenses, which OGX acquired for 280 million reais on May 14 after outbidding BP Plc and A.P. Moeller-Maersk A/S. The move leaves OGX with 35 blocks to develop in Brazil and Colombia, including areas holding the Tubarao Martelo offshore field where it has an agreement to sell 40 percent to Petroliam Nasional Bhd. for $850 million.
OGX’s debt restructuring, which Petronas says is a requirement for its deal, looms as the next major event in the fall of 56-year-old Batista, a Rio de Janeiro entrepreneur who amassed and lost more than $30 billion after his commodities startups failed to turn profits. Batista this month agreed to cede control of port operator LLX Logistica SA to EIG Global Energy Partners LLC as he attempts to convince companies including Glencore Xstrata Plc to buy a stake in mining unit MMX Mineracao & Metalicos SA or its assets.
“The main challenge right now is negotiations with bondholders and making sure the deal with Petronas goes well,” Manuel Fernandes, the head of accounting and consulting company KPMG LLP in Rio de Janeiro, said by telephone. “My understanding is that the assets are for sale and the company is trying to find a new partner to run the business.”
OGX bondholders hired Rothschild to advise on a debt restructuring, a person with direct knowledge of the matter said this month, asking not to be identified because the selection process is private. OGX’s press department in Rio didn’t respond to a request to comment on its cash holdings and progress on selling a stake to Petronas.
Batista’s flagship company, the worst-performing major oil stock in emerging markets this year, returned licenses where it was unable to find partners, it said yesterday. The second-highest bidders now have the option of matching OGX’s offers to take over the projects, Brazil’s oil regulator ANP said in an e-mailed reply to questions.
“It’s the first time I’ve seen something like that,” Fernandes said. “The company’s financial situation is so deteriorated it’s not even able to comply with the bonus.”
OGX’s cash fell 72 percent in the second quarter to $325 million, less than its average quarterly capital expenses in the past year. OGX probably will run out of cash by the end of September without the Petronas injection, Deutsche Bank AG analyst Marcus Sequeira said in a note to clients. OGX’s $2.56 billion in bonds due in 2018 trade at 17 cents on the dollar.
‘Light on Cash’
The company made the right decision to curb its exploration campaign and focus on extracting oil it has already found, Lucas Brendler, who helps manage about 4 billion reais at Geracao Futuro Corretora in Porto Alegre, Brazil, said by telephone. It needs to advance with its last hope to boost sales, the Tubarao Martelo offshore field, where it plans to start pumping before the end of this year, he said.
“We saw it as something positive because the company is very light on cash, and there’s the issue of the debt,” Brendler said. “It’s still hard to see what the future holds.”
OGX shares are down 84 percent this year, the steepest loss among oil companies from developing countries tracked by Bloomberg with a market value of at least $100 million. Deutsche Bank has a target price of 10 centavos for the stock.
The exposure of Brazil’s state development bank BNDES to companies controlled by Batista and his EBX Group Co. is diminishing as the entrepreneur sells assets, Luciano Coutinho, president of the bank, told lawmakers in a congressional hearing in Brasilia yesterday.
Coutinho named Batista’s sale of a controlling stake in LLX and power company MPX Energia SA’s share sale as transactions that benefited the bank.
“We have a very comfortable position in connection with EBX,” Coutinho said, putting BNDES’s lending to Batista companies at about 6 billion reais. “So far, BNDES hasn’t had any losses from operations with EBX.”
OGX’s failures at producing oil in the Campos Basin cast doubts on its ability to extract at Tubarao Martelo with Petronas, Ruaraidh Montgomery, a senior analyst at oil and gas researcher Wood Mackenzie, said by phone from Houston.
“It’s still going to be dependent on how Martelo performs, and that’s not at all certain,” Montgomery said. “You look at all the fields around Martelo and they are all very difficult carbonate producers.”
OGX planned to surpass production rates at state-run Petroleo Brasileiro SA at Campos by targeting an older layer of the Earth’s crust holding carbonate reservoirs formed from ancient reefs. The highly-pressurized deposits would forfeit the crude with less of a fight than the sandstone formations in the same basin where Petrobras had been drilling for decades, OGX said before it raised 6.7 billion reais in an initial public offering in 2008.
The geology proved to be more difficult than OGX expected, with flow rates varying sharply across the fields it discovered. OGX will abandon three projects it previously declared commercial in Campos and may halt work at Tubarao Azul, its first crude-producing field, next year. Tubarao Azul is shut after pumps malfunctioned at all three wells.
“One thing that’s very clear: they didn’t appraise the fields properly before putting out that production target of 1.4 million barrels a day in 2019,” Montgomery said. “They wildly overestimated the oil in place.”
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