By Sabrina Lorenzi and Niluksi Koswanage
RIO DE JANEIRO/KUALA LUMPUR Aug 27 Shares of OGX Petróleo e Gas Participações SA slid 14.8 percent on Tuesday as the troubled oil producer abandoned its plan to purchase several oil exploration licenses and its venture with the Malaysian state oil company appeared to be in serious trouble.
OGX shares tumbled their most in six weeks, closing at 0.69 reais. Shares of the oil company, controlled by embattled tycoon Eike Batista, are the biggest decliners in Brazil's Bovespa benchmark index this year, down 84 percent.
In a plan to reduce risks in exploration and production and to protect cash, Rio de Janeiro-based OGX agreed to return nine blocks for which it bid alone in a recent government oil-license auction. OGX will pay a fine of 3.42 million reais ($1.41 million) for not acquiring the areas, according to a securities filing.
In addition, Malaysia's Petroliam Nasional Bhd, or Petronas, tied a payment of $850 million for a 40 percent stake in two blocks of the OGX-controlled Tubarão Martelo field to the completion of a debt restructuring plan by the Brazilian firm. OGX needs the cash from the sale to keep drilling for oil and stay current on about $3.6 billion of bonds.
Petronas Chief Executive Shamsul Azhar Abbas told reporters in Kuala Lumpur that OGX's "debt restructuring has to happen first" for the deal with Malaysia's state oil company to be finalized.
"The proceeds from this sale are the main source of funding for OGX at this time," Marcus Sequeira, an analyst with Deutsche Bank Securities, wrote in a note to clients on Tuesday.
Batista, OGX's controlling shareholder, is grappling with a big debt pile and dwindling confidence in his crumbling Grupo EBX conglomerate of mining and energy firms. OGX faces bond interest payments of about $40 million in October and $100 million in December. Analysts say the company may run out of cash by September.
Batista has seen his fortune, listed as the world's seventh-biggest last year by Forbes Magazine, fall by more than $25 billion over the past 18 months. Grupo EBX has suffered from a series of project delays, mounting assumption of debt and dwindling confidence in some of its main companies.
OGX's 8.375 percent bond due in 2022 traded at around 17 cents on the dollar on Tuesday, deep into distressed territory.
Holders of OGX bonds hired investment bank Rothschild to advise on a potential restructuring, two sources told Reuters last week. Pacific Investment Management Co, the world's largest bond fund, known as PIMCO, is leading the so-called creditors' committee, which owns more than half of OGX's outstanding bonds.
The selection of Rothschild followed a recent move by OGX to hire Blackstone Group LP to help "review its capital structure."
Petronas is not involved in OGX's debt restructuring plan, Abbas said.
The Tubarão Martelo field straddles the two blocks in which Petronas is buying a 40 percent stake. The field is located about 95 km (59 miles) off the coast of Rio de Janeiro state. Its estimated 285 million barrels of recoverable oil and natural gas equivalent resources could supply all of Malaysia's oil needs for about 15 months.
Brazilian regulator ANP has not approved the Petronas-OGX deal because Petronas has yet to present the necessary financial guarantees to back up the purchase, a government source told Reuters late on Monday.
OGX gave up on the acquisition of blocks BAR-M-213, BAR-M-251, BAR-M-389, CE-M-663, FZA-M-184, PN-T-113, PN-T-114, PN-T-153 and PN-T-168, saying it needed to "review the exposure to exploration and production risk," the filing said.
OGX's current lack of liquidity, as well as the realization by Batista and OGX management that it would be difficult to sell stakes in those blocks at favorable terms in the short run, likely was behind the decision to return the blocks, Sequeira said. BP Plc and Brazil's Petra Energia were among the companies that lost out to OGX in the bidding for some of those areas.
OGX will stay in the blocks it acquired jointly with Exxon Mobil Corp, France's Total SA and Brazil's QGEP Participações SA, the filing said.
"The strategy of risk concentration proved to be very detrimental to the company," Sequeira added. "We find it difficult to believe that management was unaware of these risks."
In a separate filing, Batista pledged to inject as much as $50 million into shipbuilder OSX Brasil SA with the proceeds from the sale of part of his holdings in the company. OSX's board of directors exercised a so-called put option under which Batista was forced to inject fresh capital into OSX.
Batista will sell the equivalent of $50 million of his shares in OSX to pay for the capital injection.
Shares of OSX, which counts OGX as its biggest customer, closed 20.8 percent lower at 0.99 reais, their biggest one-day drop on record.