Eike Batista’s OGX Petroleo & Gas Participacoes SA rose the most on the Ibovespa on prospects the former billionaire will inject cash needed to keep his oil explorer operating through a $1 billion put option.
OGX jumped 27 percent to 52 centavos at the close of trading in Sao Paulo, extending a weekly gain to a record 73 percent and reducing a year-to-date loss to 88 percent. The stock soared as much as 49 percent earlier, the biggest intraday gain since a 2008 initial public offering.
Batista agreed to the put option last year to guarantee the company would have enough cash to expand exploration in Brazil. Since then, production collapsed at OGX’s first project and Deutsche Bank AG said Aug. 27 that the company would run out of cash by the end of this quarter if it doesn’t receive an injection. The plunge in OGX’s shares pushed Batista off the Bloomberg Billionaire Index in July.
“The expectation was that this wouldn’t happen,” Felipe Rocha, an analyst at Omar Camargo Investimentos, said by phone from Curitiba, Brazil. “It hit the market as a surprise.”
OGX is asking for $100 million upfront as it exercises the put option and may request additional disbursals, the Rio de Janeiro-based company said in a filing today. Under terms of the option, Batista would pay 6.3 reais per share, compared with yesterday’s 41-centavo close.
The entrepreneur will need to sell additional assets to fulfill the entire $1 billion pledge, Rocha said. Batista has been selling pieces of his natural resources and logistics empire to help pay debts and cover investments. He sold 7 percent of OGX shares from Aug. 28 through Sept. 3 while maintaining control of the company and is seeking buyers for MMX Mineracao & Metalicos SA, his mining unit.
“The company exercised the option, but does Batista have the money?” said Michael Wang, an analyst at IHS Herold in Norwalk, Connecticut. “What if the guy doesn’t have $1 billion? That’s a problem.”
Batista’s holding company, EBX Group, didn’t respond to an e-mail seeking comment about whether he will pay the put option. OGX declined to comment on Batista’s willingness to pay in an e-mailed reply to questions.
“It’s painful,” said Eric Conrads, who manages about $750 million of Latin American stocks at ING Investment Management in New York. “He’s selling at 50 centavos and has to buy at 6.3 reais. Maybe I’m bad at mathematics but it doesn’t seem like a good deal to me.”
The decision to exercise the option comes amid a dispute with Malaysian producer Petroliam Nasional Bhd. Petronas Chief Executive Officer Shamsul Azhar Abbas said Aug. 26 that an agreement to buy a 40 percent stake in OGX’s Tubarao Martelo field hinges on a debt restructuring. OGX plans to start production at Martelo before the end of the year and it has already drilled six wells at the offshore deposit.
OGX said Aug. 28 that Petronas has no right to delay the deal, which still needs to be approved by regulators. Under the agreement, OGX will get $250 million when it’s signed and the rest in stages contingent on production targets.
“This injection, if it really happens, would only allow OGX to survive for some time while it struggles to renegotiate debt and tries to reach an agreement with Petronas,” Roberto Altenhofen, an analyst at equity research firm Empiricus, said by phone from Sao Paulo. “Nobody questions the fact that the company doesn’t have enough money to honor its short-term commitments.”
OGX said it will seek additional funds from the $1 billion put when it needs the cash.
“Management of the company, in a unanimous decision, exercised the option against the controlling shareholder,” OGX said in today’s statement. “With immediate disbursal of $100 million and the remaining in tranches depending on the cash needs of the company.”
The put option doesn’t resolve OGX’s need to restructure its dollar debts, a process that could reduce the value of the company’s shares to as little as zero, Credit Suisse AG analysts Vinicius Canheu and Andre Sobreira said in a note to clients.
“Fundamentally, a $3.6 billion debt is higher than OGX’s asset value, which in theory leaves zero value left for the equity,” the analysts said. “The outlook remains grim.”
OGX shareholders would be left with nothing if bondholders force OGX to file for bankruptcy and sell the company’s assets, Canheu and Sobreira said. OGX has $1.9 billion in assets, including $1.1 billion in Tubarao Martelo, they said, adding that a sale by bondholders under a liquidation could involve a deep discount to fair value.
Canheu and Sobreira estimate that if bondholders convert the securities into shares, it would reduce the value of existing shares to 15 to 20 centavos each.
OGX bondholders hired Rothschild to advise on a debt restructuring, a person with direct knowledge of the agreement said last month, asking not to be identified because the selection process is private. OGX hired Blackstone Group LP “for the ongoing evaluation of its capital structure,” according to an Aug. 14 statement.