OGX Petroleo (OGXP3) & Gas Participacoes SA, controlled by the former billionaire, said in a statement yesterday that it has cut payments to all but “critical” suppliers to its most promising field. Diamond Offshore Drilling Inc. (DO), Ensco Plc (ESV) and Schlumberger Ltd. (SLB) are among those paying the price.
The company, based in Rio de Janeiro, expects to run out of money in late December after missed targets at its offshore deposits spurred a 95 percent drop in market value. OGX is cutting staff, selling assets and accruing debt with suppliers as it focuses on resurrecting a deal with Petroliam Nasional Bhd. for the Martelo field, its last hope to start making money.
“Payments are only made to critical vendors who currently perform services at the Martelo field to get first oil production up and running,” OGX said in an Oct. 7 document, titled Project Olympic, posted on its website yesterday.
Diamond Offshore, a subsidiary of Loews Corp. (L), said Oct. 24 that it wrote off $58 million in the second and third quarters on missed payments related to contracts with OGX. Loews is led by Chief Executive Officer James Tisch.
Ensco, the offshore drilling contractor building six rigs, said last week that a loss of $27 million for a pair of vessels contracted to OGX reduced quarterly earnings by 12 cents per share.
One of Diamond’s rigs being used by Batista’s company was transferred to another Brazilian operator and another is bound for operations in Asia Pacific, Diamond’s Chief Executive Officer Lawrence Dickerson said on an Oct. 24 conference call.
“Although it was once a very strong company, projects that were ultimately judged non-commercial have deprived OGX of the cash necessary to meet its obligations,” he said.
Still, the writedown represented less than 5 percent of revenue that Diamond collected from OGX since 2008, Dickerson said. The company once had as many as five rigs working for Batista’s company in Brazil.
General Electric Co. (GE), which in July said it wrote down a $300 million investment in Batista’s holding company, and seamless steel pipe maker Tenaris SA (TEN) are also among suppliers to OGX, according to data compiled by Bloomberg. Tenaris declined to comment in an e-mailed response sent by an external public relations representative in Brazil.
Schlumberger, the world’s largest oilfield services contractor, first talked publicly about its work for OGX in July 2009 when it was hired for services on four deep-water rigs. The two-year contract with possible extensions covered 11 blocks in the Santos and Campos Basin.
Technology that OGX acquired from Schlumberger included real-time monitoring, directional drilling and the ability to evaluate the formation for oil while reducing risk in the high pressure and high temperatures of exploring for crude offshore.
Schlumberger’s management of large projects for OGX “is probably the most advanced one of those that we have,” Andrew Gould, CEO at the time, told analysts and investors on an October 2010 conference call.
“In recent months, Schlumberger began experiencing delays in payment from OGX,” according to a Oct. 23 regulatory filing in the U.S. “At this time, it is not possible to predict the ultimate outcome of this situation.”
Jose Firmo, the head of Schlumberger’s Brazil unit, declined to comment when asked at a conference in Rio yesterday about money owed by OGX. The press departments of Diamond Offshore and Ensco referred to comments made in last week’s earnings calls when asked about OGX receivables.
Claims from suppliers amount to $546 million, OGX said in a September presentation also posted on its website yesterday. OGX released the presentations as part of an arrangement with bondholders after restructuring talks concluded without reaching an agreement.
OGX has also delayed payments to Batista’s shipbuilder OSX Brasil SA. OSX is preparing to remove a production vessel from the Tubarao Azul offshore field after missed payments. OGX has failed to meet production targets at Azul and output has been shut since July, when the company said it was repairing subsea equipment.
One of the Ensco rigs is already leased to another customer and moving to the Mediterranean. The other, capable of working in water as deep as 1,000 feet, may be out of work for several months as it hunts for a new customer, Luke Lemoine, an analyst at Capital One Southcoast in New Orleans, said.
The four rigs OGX leased from Diamond and Ensco were lower end, meaning their rates were about half that of the world’s most expensive drilling rigs that rent for more than $600,000 a day, Lemoine said in a phone interview.
“It’s not good for them right now, but longer term, I’m not terribly concerned about it,” said Lemoine, who rates Ensco and Diamond shares the equivalent of a hold and owns none. “There’s no guarantee that even if OGX had had money that they would have renewed those rigs.”
OGX’s failure to reach a restructuring deal after months of talks with bondholders opens the way for a bankruptcy protection filing that would put $3.6 billion of dollar bonds into default.
Earlier this month, two people with direct knowledge said OGX was considering filing for bankruptcy protection late October or early November. Once a judge accepts a filing, the company would have 60 days to present a restructuring plan.
An official at OGX’s press office in Rio, who isn’t an authorized spokesperson, declined to give additional comments when reached by phone yesterday.
The company’s cash fell to about $82 million at the end of September, it said in a second document dated Oct. 7 and posted on its website yesterday. OGX has an enterprise value of $2.72 billion in a “base case” operating model, the company said. That’s more than seven times OGX’s market valuation.