OGX Liquidation Signaled as Oil Reserves Plummet: Brazil Credit
Eike Batista’s OGX Petroleo & Gas Participacoes SA is trading in the bond market as if it will be liquidated after an audit showed reserves at the company’s main oil field are 62 percent less than it had estimated.
OGX’s $2.56 billion of notes due 2018 have sunk 8.9 cents to a record 6 cents on the dollar after reserves-auditing firm DeGolyer & MacNaughton said Oct. 3 the Brazilian company’s Tubarao Martelo field may hold up to 108.5 million barrels of crude, compared with an OGX estimate of 285 million last year. The notes have plunged 93 percent in 2013, the most in emerging markets. OGX is considering filing for bankruptcy protection this month after missing a $45 million interest payment on its 2022 bonds Oct. 1, said two people with knowledge of the matter.
The bond prices indicate creditors expect OGX will be liquidated in bankruptcy, increasing the risk investors including Pacific Investment Management Co. will fail to recover any money, according to Western Asset Management Co. and SW Asset Management LLC. JPMorgan Chase & Co. wrote Oct. 3 that the lower reserves estimate and the need for “significant upfront” cash to develop Tubarao Martelo may prompt Petroliam Nasional Bhd. to drop its bid to buy a 40 percent stake in the field, and that bondholders have to value OGX assuming a liquidation.
“This reserve report just blew the lid off,” Robert Abad, who helps oversee $51 billion of emerging-market assets at Pasadena, California-based Western Asset, said in a telephone interview. “You have OGX in free fall. You can see the domino effect of that reserve report coming out and putting into clear light how bad the situation has always been. We just didn’t know.”
The bankruptcy filing would be done in Rio de Janeiro, where OGX is based, said the people, asking not to be identified as discussions are private. While Batista is negotiating with creditors to avoid the same process for shipbuilder OSX Brasil SA (OSXB3), the most likely outcome is that both companies will seek legal protection, they said. The proceedings would put $3.6 billion of OGX dollar bonds into default in Latin America’s largest corporate debt debacle.
OGX declined to comment in an e-mailed response to questions. Azeman Said, a spokesman for Petronas, declined to comment on the deal in an e-mail.
Pimco spokesman Michael Reid didn’t respond to telephone and e-mail requests seeking comment. A group of OGX creditors, led by Pimco, have hired Rothschild Inc. as financial advisers and law firm Cleary Gottlieb Steen & Hamilton LLP to represent them.
Petronas agreed in May to pay $850 million for the 40 percent stake. Based on the Oct. 3 reserve report, that’s actually the value of the full field, valuing Petronas’s stake at $438 million, Morgan Stanley wrote in an Oct. 3 note to clients.
OGX and Petronas have contradicted each other over the deal’s conditions. Shamsul Azhar Abbas, Petronas’s chief executive officer, said Aug. 26 the agreement hinges on OGX restructuring debt. OGX said two days later that the Malaysian company had no right to delay the deal. Petronas’s first $250 million payment is due once the deal receives regulatory approval and a second, $500 million payment is due when production starts, which OGX said will happen before year-end.
If Petronas walks away from the purchases because of last week’s reserves report, “it is unclear if another party would provide capital to develop Martelo,” JPMorgan analysts led by Gregg Brody wrote last week.
OGX bonds could become worthless if a solution isn’t found, according to the JPMorgan analyst. OGX in July said that its only producing oil field, Tubarao Azul, will be shut down next year and canceled plans to develop three others because they aren’t economically viable.
OGX has 30 oil and natural gas concessions in Brazil that may be revoked if it files for bankruptcy protection, according to contracts it signed with the oil regulator. ANP said it will adhere to the concession contract in an e-mailed response to questions last month, without elaborating.
The company has been looking for existing creditors to provide as much as $500 million of new cash along with debt relief so it can operate long enough to start pumping oil from Martelo. OGX, which burned through about $7.2 million in cash a day in the 12 months through June 30, was set to run out of funds last month, according to data compiled by Bloomberg.
“Cash position is critical and the company is likely to request court protection to restructure its debt,” Morgan Stanley analysts Bruno Montanari and Guilherme Bellinetti wrote last week.
Filing for bankruptcy protection would allow OGX to sell some of its assets and negotiate labor debts while being shielded from creditors, Leonardo Theon de Moraes, a bankruptcy lawyer at Sao Paulo-based Mussi, Sandri & Pimenta Advogados, said by telephone.
“The advantage of bankruptcy protection is that it has mechanisms to guarantee the company gets some breathing space,” Theon de Moraes said. “If OGX has the capacity to survive the crisis, bankruptcy protection works very well.”
Once a judge accepts a filing, the company would have 60 days to present a restructuring plan.
The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries fell three basis points, or 0.03 percentage point, to 233 basis points at 11:54 a.m. in New York, according to JPMorgan index data.
Brazil’s five-year credit default swaps, contracts protecting holders of the nation’s debt against non-payment, were little changed at 165 basis points. The real appreciated 0.1 percent to 2.2028 per dollar.
Batista, whose fortune has plunged 99.9 percent from its high last year, took OGX public in 2008 and sold bonds overseas twice in the following three years by promising production of 730,000 barrels per day by 2015. Instead, Tubarao Martelo is likely to be OGX’s only producing oil field next year. The DeGolyer report said that none of the 108.5 million barrels at Martelo are proven reserves.
“The news flow has been horrible,” Ray Zucaro, a money manager at SW Asset Management, which oversees $375 million of emerging-market debt, said in a telephone interview. “I do think JPMorgan was right in saying this is a zero.”