* Three offshore oil prospects dumped
* OGX to cancel ship orders, pay OSX compensation
* Rival HRT also scales back Amazon natgas plans
(Adds bond decline details, comment, rival HRT; updates prices)
By Jeb Blount
RIO DE JANEIRO, July 1 Brazilian billionaire
Eike Batista's flagship oil company OGX Petroleo e Gas SA
slashed capital spending on Monday and pulled the
plug on three offshore oil prospects, the latest move by his EBX
Group to bolster finances and avert collapse.
OGX shares fell as by as much as 39 percent, touching a
record low. Once Brazil's second largest oil company by market
value and a symbol of Brazil's now-stalling, decade-long
commodities boom, OGX shares are trading at less than 3 percent
of their all-time high.
"OGX has just sent a statement that alters practically the
entire outlook on which market expectations for the company have
been based," Luiz Caetano, an oil and gas analyst with Planner
Corretora in Sao Paulo, said in a note to investors on Monday.
"We are now at a new level, one of survival rather than
OGX's move comes as the six-year-old company struggles to
turn promising offshore discoveries into producing fields.
Output from OGX's first offshore field, Tubarão Azul, began in
early 2012 at far below expectations. That raised concern OGX
would soon be unable to generate revenue to finance ships, drill
new wells and pay its debts.
The plunge in the share prices of OGX and other EBX Group
companies has sliced more than $20 billion from Batista's
fortune. Most of his wealth is tied up in his companies, which
has led investors to question the billionaire's ability to meet
his own promises.
As shares fell and project delays mounted, Batista has
offered to prop up EBX's oil, mining, shipbuilding, transport
and electricity companies with billions in new cash that he
might no longer have or be able to borrow.
Many now believe Batista's entire EBX empire is on the verge
of collapse. OGX is spending about $500 million every three
months, giving it about 9 months to burn through its remaining
$1.1 billion of cash, HSBC said in June.
"This is very bad news," said Luis Gustavo Pereira, a
strategist at Futura Corretora, a Sao Paulo brokerage. "Things
were not looking good for OGX in the coming year. Now they look
even more critical."
OGX said a promise by Batista, the controlling shareholder,
to inject up to $1 billion of new capital by the end of March
2014 "is still valid." The company also denied speculation it
plans to file for bankruptcy protection.
THREE DEAD SHARKS
OGX will cut costs by suspending the development of the
Tubarão Tigre, Tubarão Gato and Tubarão Areia offshore areas
northeast of Rio de Janeiro, the company said in a securities
filing on Monday. In English, the names mean "Tiger Shark," "Cat
Shark" and "Sand Shark."
The decision is an about-face for OGX, which rushed to
declare to Brazil's oil regulator that the areas were
commercially viable in an effort to speed up production and
OGX's three producing wells at Tubarão Azul, or "Blue
Shark," the company's only active offshore field, could stop oil
and natural gas production as soon as next year, OGX said. In
addition to lower than expected initial output, Tubarão Azul has
suffered equipment and reservoir problems.
A reassessment of the geological surveys of Tubarão Azul,
where the oil is in relatively dense carbonate rocks, led OGX to
conclude there was no existing technology that could
economically extract the oil at the moment, the company said.
OGX also produces natural gas in partnership with electric
utility MPX Energia SA from onshore fields in
Brazil's northeast. While OGX has lost its position as Brazil's
No. 2 oil company to QGEP Participacoes SA, OGX and
MPX together were Brazil's No. 3 oil and natural gas producer in
April after state-run leader Petroleo Brasileiro SA, or
Petrobras, and Great Britain's BG Group Plc.
Together OGX and MMX produced 19,921 barrels of oil and
natural gas equivalent per day (BOEPD) in April, or 0.8 percent
of Brazil's total production of 2.39 million BOEPD. As recently
as 2010, OGX expected to produce 1.4 million BOEPD, or more than
half of Brazil's current output.
OSX ORDERS CUT
OGX is not alone in scaling back its outlook for Brazilian
oil. Brazil's HRT Participações em Petróleo SA, the
No. 3 Brazilian oil company by market value, also said on Monday
that it is reducing exploration activity in Brazil's Amazon
region after disappointing results.
The Rio de Janeiro-based OGX also asked shipbuilding
sister-company OSX Brasil SA to stop building several
oil platforms meant for the canceled projects. OGX said it no
longer considers Tubarão Tigre, Tubarão Gato and Tubarão Areia
OGX will pay OSX $449 million in cash as compensation.
After dropping as much as 11 percent, OSX shares closed down
5 percent at 1.33 reais in Sao Paulo. OGX also trimmed losses
and closed down 29 percent at 56 centavos.
Pressure to cut spending cuts has been mounting on OGX for
months on concern about a possible default on its 8.94 billion
reais ($4.01 billion) debt.
OGX bonds due in 2018 and 2022
have been losing value since March. The 2018 debt fell to 20.25
bid, or about a fifth of face value, on Monday, according to
Thomson Reuters IFR. The 2022 bonds fell even lower, to 18
percent of face value.
Such values are seen as an indication that investors
consider a default likely.
In May, Batista sold 70.5 million OGX shares for $57
million, cutting his stake to 59 percent from 61 percent. He
sold the stock for less than one-third of what he has promised
to pay for new shares.
The promise to buy the new shares, known as a put option,
requires that Batista buy up to $1 billion of OGX stock at 6.30
reais a share by April 2014 if the OGX board finds it necessary.
Selling stock below the put price raised speculation that
Batista lacks the cash to honor his promise. In response, Fitch
Rating Service downgraded OGX debt to "CCC" on June 17,
indicating it was at high risk of default.
The following week brought the resignation of three
prominent board members with the responsibility of deciding when
to request the put.
($1 = 2.23 Brazilian reais)
(Additional reporting by Silvio Cascione, Asher Levine,
Danielle Assalve and Guillermo Parra-Bernal in Sao Paulo;
Writing by Jeb Blount; Editing by Gerald E. McCormick, Jeffrey
Benkoe, Chris Reese and Andre Grenon)