OGX Seen Worthless by Deutsche Bank to Gradual: Corporate Brazil

OGX Seen Worthless by Deutsche Bank to Gradual
EBX Group Co. Ltd chief executive officer Eike Batista is trimming his OGX stake by selling shares near record-low levels, deepening a market rout. Photographer: Jonathan Alcorn/Bloomberg

Eike Batista’s OGX Petroleo & Gas Participacoes SA is worthless and the oil company’s $672 million market value is being inflated by a presence in Brazil’s benchmark index, according to brokerage Gradual Investimentos.

Deutsche Bank AG’s Marcus Sequeira, the most accurate OGX analyst in a Bloomberg Absolute Return Ranking, and Bank of America Corp.’s Frank McGann estimate the stock is worth 10 centavos, or about 4 cents. OGX’s market value has sunk 98 percent to 970.8 million reais ($407 million) since it first reported output declines at its sole producing field in March 2012. OGX, which has a 1.75 percent weighting on the Ibovespa, plummeted 40 percent to 30 centavos in Sao Paulo today.

“Passive funds that track the Ibovespa need to buy OGX, and most of the share value we see is due to this Ibovespa presence,” Marcos Elias, a partner at Sao Paulo-based Gradual, said by phone. “The market isn’t perfect and is driven by expectations and so companies with zero value usually stay around 0.1 real.”

The falling value of OGX’s assets would complicate efforts to restructure $3.6 billion of bonds with investors including Pacific Investment Management Co. and Blackrock Inc. OGX this week returned nine oil licenses acquired in May, and investors are concerned an $850 million deal to sell stakes in two fields to Malaysia’s Petroliam Nasional Bhd. may fall through.

OGX bondholders hired Rothschild to advise on a debt restructuring, a person with direct knowledge of the agreement said this month, asking not to be identified because the selection process is private.

Corporate Restructuring

Batista hired Angra Partners to oversee a reorganization of his EBX Group Co. holding company, a person with knowledge of the contract said. Angra, a Sao Paulo-based private-equity and consulting firm, will work alongside Grupo BTG Pactual in advising the businessman, the person said, also declining to be identified because the contract hasn’t been made public.

OGX said it’s assessing options to improve its capital structure in an e-mailed response to questions, declining to comment on the value of its stock and presence in the Ibovespa. OGX hired Blackstone Group LP “for the ongoing evaluation of its capital structure,” according to an Aug. 14 statement.

Batista is trimming his OGX stake by selling shares near record-low levels, deepening a market rout. OGX’s cash fell 72 percent in the second quarter to $325 million, less than its average quarterly capital expenses in the past year, while debt rose to a record 8.7 billion reais.

Net Assets

The difference between OGX’s total assets and liabilities shrank to 2.24 billion reais in the quarter, the lowest on record, according to data compiled by Bloomberg.

Of 15 analysts that posted recommendations on OGX shares this year, five advise investors to sell and three say hold, while the other seven have the stock under review, according to data compiled by Bloomberg.

BM&FBovespa SA is considering excluding stocks trading for less than 1 real, or penny stocks, from the Ibovespa, which is otherwise weighted just by trading volume, according to a statement on the exchange operator’s website. OGX, which has tumbled amid production shortfalls and dwindling cash, is the only stock on the index below that threshold.

Under BMF&Bovespa’s current criteria for the Ibovespa, OGX’s weighting will more than double to 4.3 percent in September because of increased trading of the shares in the past 12 months, according to the bourse’s Aug. 16 index preview. By comparison, the Standard & Poor’s 500 Index is a capitalization-weighted gage and the Dow Jones Industrial Average is a price-weighted index.

New Rules

New rules will be announced on Sept. 13 and will only take effect next year, BM&FBovespa Chief Executive Officer Edemir Pinto said yesterday at an event in Campos de Jordao, Brazil. OGX would be removed from the Ibovespa if it defaults on debt and is put under bankruptcy protection, he said.

“OGX’s pricing action has been dictated by technical aspects of the Ibovespa rebalancing,” Itau BBA said of the increased weighting expected for next month in a note to clients. “A capital restructuring is still a real possibility. This would lead to the immediate deletion of the stock from the index.”

The exchange referred to statements on its website in an e-mailed response to questions on the proposed index changes. The changes will be based on studies by a task force coordinated by the exchange and comprising asset managers, brokers, companies and banks, BM&FBovespa said.

Fire Sale

Batista’s fire sale of assets includes shares of OGX and shipbuilder OSX Brasil SA to pay debt. Earlier this month he agreed to cede control of his logistics unit LLX Logistica SA and is in talks to sell his controlling stake in MMX Mineracao & Metalicos SA, Brazil’s fourth largest iron-ore producer.

OGX may rally in coming days because of demand from funds and investors that need to cover positions, Gradual’s Elias said.

“Because of the excess of short positions and the rebalancing of the Ibovespa, there’s a possibility the shares will go through a short squeeze,” Elias said, referring to the sudden rise in the value of a stock because demand to cover positions or meet index-related fund targets exceeds supply.

Expectation that Batista will sell OGX shares to passive funds is helping stem a short squeeze, said Rafael Ferri, a minority OGX investor who says the company lost him about 1 million reais in a complaint to Brazil’s securities regulator.

Batista, who was the world’s eighth-richest person last year, has fallen out of the ranks of billionaires as his companies’ stock prices plunged.

Dwindling Cash

Petronas, as the Malaysian state-run oil producer is known, said this week its purchase of stakes in OGX’s fields hinges on a debt restructuring, prompting OGX to say Petronas has no right to set that condition.

Without proceeds from the sale, OGX probably will run out of cash in the third quarter, Deutsche Bank’s Sequeira said in an Aug. 27 report.

“The proceeds from this sale are the main source of funding for OGX at this time,” he said.

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