Fitch Ratings sees no near-term liquidity crunch at Brazil' s OGX
BY JEFF FICK
RIO DE JANEIRO -- OGX Petroleo e Gas Participacoes is not facing a liquidity crunch despite a brutal selloff this week in the company' s shares, Fitch Ratings analyst Ana Paula Ares said in an interview.
The slide in OGX' s shares and bonds, triggered by lower than expected oil production and a debt downgrade by Standard & Poor' s, has raised questions about the ability of billionaire Brazilian businessman Eike Batista' s flagship company to carry out its exploration and development plans. The failure to boost crude oil production has also created worries that Mr. Batista' s other companies, which span industries as diverse as mining, real estate and shipbuilding, will fail to generate returns for investors.
"How production volumes evolve this year and next will determine the long term health of the company" Ms. Ares said. Fitch rates OGX at single B with a stable outlook. Standard and Poor' s cut the company to single B minus with a negative outlook this week. The third major ratings agency, Moody' s Investors Service, rates OGX at B1 with a negative outlook.
Fitch isn' t anticipating any adjustments to its rating right now, but the firm wouldn' t hesitate to act should a new event require a change, the analyst said. Still, OGX is not in the midst of a catastrophic event despite recent volatility in the company' s shares and a downturn in the price of its bonds.
"Single B is not the rating of a company near default" Ms. Ares said. "OGX doesn' t have any immediate debt maturity, so that gives the company some room to maneuver and ramp up oil production." OGX' s $2.6 billion bond doesn' t mature until 2018.
Fitch' s rating also reflects that OGX is a start-up company that was expected to encounter "very tight" credit measures as the oil company spent heavily on exploration and development while producing a limited amount of crude oil, Ms. Ares said.
The $1.7 billion in cash OGX had on hand at the end of 2012 will be enough to fund the company' s $1.3 billion in planned investments for 2013, Ms. Ares said. In addition, the lower than expected crude oil output should also generate enough revenue for 2014' s spending, she added.
"We do not perceive any liquidity issue right now" Ms. Ares said.
OGX also holds a $1 billion put option with controlling shareholder Mr. Batista that would require the entrepreneur to buy $1 billion worth of stock at $3.17share. The put option expires on April 30, 2014. The way those funds are put to work could be significant, Ms. Ares said.
"If they acquired an asset that is already generating cash or could be put into production quickly, that would be neutral or positive" Ms. Ares said. But new concessions in undeveloped areas, such as participation in Brazil' s auction of new oil and natural gas concessions planned for May would not be seen in the same light because it would likely require more significant investment and longer exploration periods, she added.
OGX' s challenge going forward is better understanding its underperforming reservoirs, Ms. Ares said. OGX produced 11,300 boepd in February, the latest data available, well off the 40,000 boepd year-end 2012 target.
A lack of understanding about the reservoirs at the field, called Tubarao Azul, was behind the field' s lower than expected output because the first two production wells were connected by a natural fault, Ms. Ares said. When the second well started producing, it undermined output from the first well, she added. A third well that started producing earlier this year has also been underwhelming.
The issues, however, are "the normal risk of an oil company" Ms. Ares said.
The more wells OGX drills, the more knowledge the company will gain about the oil reservoirs that "will help them determine with greater degree of certainty about what future production volumes will be" Ms. Ares said.
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