If anyone doubted the meaning of a statement this week from OGX, the oil and gas flagship of Brazilian tycoon Eike Batista, they only had to read the closing paragraph.
The company said its only producing oil wells, those at its Tubarao Azul or Blue Shark field, would likely cease production next year due to unexpectedly challenging geology. This would leave OGX with a motley collection of assets including one more offshore field that is still under development, a gas field, some other interests in exploration blocks, and a ton of debt.
“The projections previously disclosed, including the ones relating to OGX’s production goals, should no longer be considered valid and should be disregarded,” the company concluded in a deadpan tone.
It was the understatement of the year and stood in marked contrast to the hype a few years ago that made OGX a symbol of the former Brazilian bull market.
Indeed, if Brazil’s recent protests have mirrored growing disenchantment with the end of the country’s commodity-fueled economic boom, the crumbling of Mr. Batista’s business empire has crystallized disillusionment in its once go-go investment story.
Just a year ago, Mr. Batista was ranked as the world’s seventh-richest man, with a $30-billion (U.S.) personal fortune. Now, thanks to missed promises among his publicly quoted Brazilian companies, his fortune was just $11-billion as of March and his position on Forbes’ billionaires’ ranking had slid to 100th place, making him the biggest faller on the list. Moreover, his wealth is still shrinking.
“OGX – what is left for the shareholder?” Credit Suisse asked in a research note on Tuesday. “Little,” it suggests. Indeed, unless OGX is bailed out either by Mr. Batista or a white knight, it seems headed for a debt restructuring and the implosion of his intricate network of companies.
“There is great discomfort on the part of investors now on whether this company can deliver on its plans,” says Ricardo Carvalho, an analyst at Fitch Ratings. The agency lowered the outlook on OGX’s credit rating on Tuesday after downgrading it earlier this month to six notches below investment grade.
Mr. Batista’s investors are a roll call of leading pension funds and asset managers, from BlackRock Inc. to Pimco to the Ontario Teachers’ Pension Fund. Lured by the promise of China’s voracious appetite for Brazil’s commodities, they helped fund his ambitious schemes to create wealth from Brazil’s natural resources at just about every stage of the supply chain.
Today, OGX bonds are the highest yielding dollar denominated bonds in Latin America, according to HSBC, after their price fell to a record low of 18 cents to the dollar on Tuesday. Only four months ago, its $2.6-billion of 2018 notes were trading at 88 cents.
OGX, of course, is only one aspect of Mr. Batista’s business empire, which is grouped under the holding company EBX and includes a core of six listed companies, which do business with each other, as well as minor exotica such as Rio de Janeiro’s best Chinese restaurant.
There is MPX, a utility company that generates power from coal mined by CCX. There is OSX, a shipping services company that supplies the rigs used by OGX; and LLX, a logistics and support company that is building a giant port at Acu, from where ships can transport iron ore from MMX, the group’s mining company.
On Thursday, Mr. Batista stepped down as chairman of MPX Energia SA, the group’s most promising company, after it was forced to call off a long-sought IPO. The company said in a statement that former board vice-chairman Jorgen Kildahl had been named interim chairman. Mr. Kildahl is also a member of the board of management of E.ON, the German utility that has a 36-per-cent stake in MPX.
The common “X” to the EBX companies’ names, as Mr. Batista has boasted, is due to their ability to multiply wealth. As growth companies they have a lot of potential but also huge cash burn.
OGX was at the core of the group’s strategy. But instead of realizing its promise to become the largest private sector oil producer in Brazil, it has sparked a crisis of confidence in the group after missing production forecasts last year. Having raised $4-billion in a 2008 stock market listing, the company’s market capitalization fell to $640-million this week, while its net debt stands at about $3-billion.
Unable to raise more debt, the group has since resorted to asset sales, such as in May, when Mr. Batista sold a 40-per-cent stake in OGX’s Tubarao Martelo or Hammerhead Shark oil field to Petronas, the Malaysian state oil company, for $850-million. Mr. Batista has also given OGX a put option under which the company can require him to buy $1-billion of stock.
But speculation has grown that Mr. Batista will be unable to honour the option. In June, three independent directors resigned without explanation even as Mr. Batista sold OGX shares at prices at a fraction of the put option, indicating he was short of cash. This week, the market regulator, CVM, announced it was investigating the option without giving a reason.
The worse was yet to come, though, with the announcement on Monday that Tubarao Azul, the only producing field, was a flop. This leaves the company with Tubarao Martelo, which is due to produce its first oil at the end of this year, as the most promising. The company also has a gas field and a stake in another oil field, Atlanta, which is due to begin producing late next year.
“Is a restructuring the next announcement?” said a headline of a report by JPMorgan Chase & Co. A Deutsche Bank note said it was downgrading its forecast for OGX to R$0.10 a share from R$0.70 “and strongly reiterating sell.”
Unless Mr. Batista exercises the put option, undertakes another asset sale or seeks help from the country’s state or private banks, a debt restructuring seems inevitable as early as this quarter, say some analysts.
OGX ended the first quarter of this year with R$2.3-billion ($1.02-billion) of cash. This quarter, it will have to pay $445-million to OSX to cancel and change equipment contracts, R$360-million to oil regulator ANP for new production blocks it won in an auction, as well as capital expenditure, estimated at about $400-million a quarter by HSBC.
“I think there may be a September event unless they come up with more cash,” says Sam Aguirre, of FTI Consulting Brasil, a corporate debt restructuring group.
The EBX Group responded by issuing a previously released statement that the group was refinancing its short-term debt and looking for further opportunities for “partnerships.”
With a file from Reuters