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Failing Brazilian Oil Investing

Brian Hicks

Written By Brian Hicks

Posted July 5, 2013

OGX (OTC: OGXPY) was an oil and gas group put up on the stock market by Brazilian billionaire Eike Batista back in June 2008. $4.1 billion was raised in capital to help fund a major offshore oil-drilling plan.

At the time, it would’ve been the biggest exploratory campaign undertaken by a private-sector entity in the nation’s history. That was five years ago.

offshore oil rigToday, as CNN notes, OGX is heading straight for bankruptcy, with shares down 90 percent over this year alone. The bad news emanating is worrisome. Work at three oil fields has been suspended, and the sole field that’s still seeing ongoing work might cease pumping as early as 2014.

Although a fifth field will continue undergoing development, the sheer scale of OGX’s problems has caused all previous production goals to mostly be shelved. This field is expected to begin pumping in Q4 of this year.

Batista has not fared well over the past few years. OGX missed projected goals for 2012, which led to a quick sell-off, reducing the company’s market capitalization to barely $800 million. Batista’s other companies, coal producer CCX and offshore services firm OSX, accordingly suffered. From a net worth of $34.5 billion in early 2012, Batista is now worth just $4.5 billion.

To make things even worse, Batista lowered his stake in OGX to 59 percent, selling 2 percent of OGX shares. That obviously led to further declines, with the ratings agency Fitch slashing OGX’s debt rating to CCC. The big question is whether Batista can even back up an option to purchase $1 billion of OGX shares by next April in the event the company badly needs cash.

Problems Within

Key board members have recently resigned from OGX, and the company (as of this March) had $1.15 billion in cash and $4 billion in debt, but then ended up canceling OSX orders for two platforms and three drilling rigs. That means OGX now has to pay up $449 million as compensation, which worsens the situation significantly.

However, the Wall Street Journal notes that, at least in the medium term, OGX will likely be able to meet debt payments through the sale of a stake in two oil fields. The company sold a 40 percent stake in the two fields to Malaysia’s Petroliam Nasional Bhd. in a deal worth $850 million.

Batista has also declared he’ll pump $1 billion into OGX if and when necessary. Whether he can back that up remains to be seen, and there is some skepticism on that point.

OGX’s next payment is due October 1—a coupon payment on the company’s 2022 bonds, which has $1.1 billion outstanding. After OGX said its last producing wells may be shuttered, the company’s shares dropped by 30 percent, meaning a loss of $300 million in market value, reports Bloomberg. Bonds for the company due in 2018 were down to 19 cents on the U.S. dollar. In the bluntest terms:

“OGX is on the ropes and could face imminent financial restructuring,” Michael Wang, an analyst at IHS Herold in Norwalk, Connecticut, said by phone. “The company may go bankrupt and not be able to pay its debt.”

Thus, OGX will have to make that $449 payment, which amounts to almost 40 percent of the company’s cash on hand as of the end of Q1. The company will need to figure out a debt restructuring or receive significant cash inflows.


Colombian Oil and Gas

But not all of South America is facing these problems. The Colombian government has undertaken a determined effort to develop that nation’s oil and gas sector.

As nearly 70 percent of the nation remains unexplored for oil, production could spike as much as 13.3 percent over the year (or so claimed Colombian Energy Minister Federico Renjifo). However, current reserves can only last about 7 more years. That’s even accounting for the fact that crude production has doubled since 2007.

Some ten percent of Colombia’s oil comes from shale reserves, and the nation is seeking to exploit this further. Both state-owned Ecopetrol SA (NYSE: EC) and Pacific Rubiales Energy Corp. (TSX: PRE) will likely assume leading positions in the Colombian pursuit for oil. Both intend to reach production levels of one million barrels per day within the next ten years.

Ecopetrol is doing well; the company achieved annual growth of 16 percent since 2008. While the government owns 89 percent of the company, private investors can purchase shares.


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