Brazil's Wealthiest Man Takes Fall in Dicey Oil Game

It was a dizzying height from which to drop. Eike Batista is the quintessential high-achieving, alpha male entrepreneur. He's the richest man in Brazil, with a group of companies active in everything from mining and shipping to oil and real estate.

The fall was the biggest anyone could remember at the Sao Paulo stock exchange, according to its chief executive officer, Edemir Pinto. No company among the five most traded had ever lost half its value in the market in just two days, as Batista's oil concern OGX did in the final days of June.

The implosion occurred after OGX announced that production from its first two wells would be half what the company -- and the market -- had anticipated.

Batista has a penchant for self-aggrandizement: He subtitled his autobiography "The Trajectory of Brazil’s Greatest Entrepreneur" and recently said he wanted to be the world's richest man by 2015. Thus it was no surprise the news media had a bit of fun, at his expense, reporting his sudden fall from grace.

TV Exame, an Internet channel connected to the business magazine of the same name, ran a graphic showing OGX as a paper ship drowning in blue waves. The humor site Kibeloco mockingly wrote of Batista:

He’s going to have to cancel the film-channel package, take the boys out of swimming lessons, sack the cleaner and sell his bicycle.

Batista was already worth billions when he entered Brazil’s promising oil business. OGX snapped up concessions estimated to contain as much as 4.8 billion barrels of oil. In 2008, the company's IPO raised $6.7 billion reais ($3.30 billion), a record in Brazil at the time, though the outfit had never produced as much as a barrel of oil.

With much fanfare, OGX began production this January in a field now called Tubarao Azul in Brazil’s Campos Basin. Expectations were high. Last year, CEO Paulo Mendonca, a former Petrobras executive known as "Dr. Oil," had predicted the field could produce as much as 80,000 barrels a day. This past May, he had forecast 40,000 to 50,000 barrels a day from four wells by 2013.

But in a carefully worded announcement June 26, OGX revealed that its first two wells were bringing in just 10,000 barrels of oil equivalent a day, half of what the CEO -- who was summarily fired -- had projected less than a month earlier.

Reaction was instant. The market value of Batista’s EBX group of companies, of which OGX is a part, fell from R$46 billion to R$32 billion by June 28, the Folha de Sao Paulo newspaper reported. By July 2, the value had recovered somewhat, to R$37 billion.

Quoted in the Estado de Sao Paulo newspaper, Hersz Ferman of the Yield Capital resource management company said OGX had blown its success finding oil by overplaying its achievement. He said, "Despite an excellent exploration campaign, OGX always comes to the market with numbers it can’t deliver.”

In an interview in the same paper, consultant Adriano Pires of the Brazilian Infrastructure Center argued that Batista hadn’t grasped the business he'd entered:

In this business, a field can be found that has the possibility of a lot of oil and ends up delivering nothing or much less than was imagined. It was this reality of the oil industry that Eike didn’t understand.

In his blog for the business paper Valor, analyst Andre Rocha outlined three lessons to be learned from the collapse of OGX’s share price. Investor relations departments need to know how to talk the language of the market. Official company estimates need to be conservative. Most important, it should be appreciated how difficult it is to evaluate companies that go public before they become operational. In the case of OGX, the company raised capital almost four years before entering into production.

“A big part of the value of pre-operational companies is found in the future,” wrote Rocha. “Investment in these companies presents the biggest risk, because the more distant their projections, the less precise they are.”

Batista’s business reputation is robust enough to survive this setback in the long term. But in the short run, investors are approaching OGX shares with trepidation. Daniel Marques, an analyst with Agora Corretora brokers quoted in the newspaper Brasil Economico, summed up the feelings of many. “The trend is still down, and the paper will remain volatile. Therefore we only recommend buying for day trade,” he said.

The market’s love affair with OGX has been battered. From now on, its commitment to the relationship is strictly conditional.

(Dom Phillips is the Rio de Janeiro correspondent for World View. The opinions expressed are his own.)

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