OGX at 4-Year Low Remains a Sell for Top Analyst

OGX Petroleo & Gas Participacoes SA’s 78 percent plunge in the past year has 13 analysts saying it’s time to buy. The stock’s best forecaster, Deutsche Bank AG’s Marcus Sequeira, disagrees.

Sequeira, 42, the most accurate OGX analyst in a Bloomberg Absolute Return Ranking, sees “a lot of risks” for investors in the oil company controlled by billionaire Eike Batista. Sequeira correctly predicted in July the stock would drop to 4 reais from 5.82 reais the day before he cut his rating to sell from hold. The shares, which reached the lowest since December 2008 last week, closed at 3.77 reais yesterday.

Five years after the oil startup raised 6.7 billion reais ($3.4 billion) in an initial public offering by vowing to produce 730,000 barrels a day in 2015, OGX is still struggling to boost output at its offshore fields after drilling setbacks and a dry well. OGX in June cut targets at two wells by as much as 75 percent, triggering a stock selloff that wiped out 7.3 billion reais in market value in a week.

“We are very far from calling a bottom on the stock,” Sequeira said in a telephone interview from New York. “The market sees that now maybe everything that is bad has been known or discounted, but we don’t think it is the case yet.”

OGX’s press office declined to comment on the stock’s decline or analysts’ recommendations. “OGX relies on an experienced management team and holds a solid cash position,” with tout about $2.5 billion in cash as of September, the company said in a Jan. 4 statement.

Net Loss

OGX, the worst-performing stock on the benchmark Bovespa index last year, has lost an additional 14 percent in 2013 through yesterday, the third-most among 126 stocks in the FTSE All-World Oil & Gas Producers Index. The stock fell 1.9 percent to 3.70 reais in Sao Paulo today, the lowest close since Feb. 6. OGX is expected to report in its March 26 earnings release that its 2012 adjusted net loss almost doubled to 894.9 million reais, the average of 15 analysts’ estimates compiled by Bloomberg.

The decline at OGX has helped reduce Batista’s net worth by $1.6 billion this year, causing him to fall out of the rankings last week for the world’s richest people.

Output at the company has fallen short of Batista’s promises after the geology at blocks in the offshore Campos Basin proved more challenging than anticipated, said Sequeira, who spoke to consultants and geologists before cutting his rating in July.

“Production per well is still going to decline further, and that obviously will have a big impact on the company’s cash flow and on the company’s balance sheet,” he said. “They clearly have a problem in that field, in Tubarao Azul.”

Tubarao Azul

OGX, which replaced Chief Executive Officer Paulo Mendonca on June 28, withdrew long-term production targets last year after two wells at Tubarao Azul -- its first developed field -- pumped less than initial forecasts. The company said Feb. 4 that average daily production of oil and natural gas per well at Tubarao Azul fell to 4,900 barrels a day in January, from 5,100 in December.

OGX also said Jan. 30 it completed work at a well known as Cozumel, near Tubarao Azul in Campos, without finding any signs of oil or natural gas.

Of the 23 analysts who cover OGX, 13 recommend buying the stock, seven say hold and three suggest selling. The stock’s recent tumble means it’s cheap when reserves and current oil prices are taken into account, said Laurence Balter, who helps manage $100 million including OGX shares at Oracle Investment Research in Fox Island, Washington.

‘Total Disaster’

“Shares are pricing in a total disaster,” Balter, who’s considering buying more stock, said in an e-mailed response to questions. “What people forget is that there are billions of oil barrels in reserves. Eventually, the vast majority of it will be extracted given the cutting edge technology we have today.”

Sequeira still sees a risk that recoverable reserves may be lower than expected, after management was too optimistic in information about its assets that it released to the market after its IPO. The company hasn’t released reserve figures since 2011.

“The oil industry is a very risky industry, and usually companies are much more cautious,” he said. “The company has learned that that style of being very optimistic has probably a short-term gain but a long-term pain because the management’s credibility gets seriously affected.”

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