OGX Petroleo (OGXP3) & Gas Participacoes SA, the Brazilian oil company that lost about 40 percent of its value last week after cutting output targets, is forecast by analysts to seek fresh capital from billionaire investor Eike Batista as it ramps up drilling.
OGX will have to boost spending after announcing it needs to drill twice as many wells to reach planned capacity at its first three projects, said Ricardo Correa, an analyst at brokerage Ativa SA.Batista, OGX’s controlling shareholder, pledged in a conference call on June 27 to increase drilling after the Rio de Janeiro-based company cut output estimates on its first two wells by as much as 75 percent.
The well results complicate the company’s efforts to become cash-flow positive by 2014 and scale back the size of its drilling fleet by as much as 50 percent in early 2013, Correa said. OGX ended the first quarter with about $3.6 billion in cash and plans to invest $2 billion this year, Chief Financial Officer Roberto Monteiro said in a June 27 call with analysts.
“By next year, the company will need some cash,” Nataniel Cezimbra, an analyst at Banco do Brasil, said in a telephone interview from Sao Paulo. “They’re going to need to present a different plan, a change in strategy.”
Moody’s Investor Service cut OGX’s outlook to negative today, saying its cash levels could “materially decline” by the end of 2013 because of the lower-than-expected production at the Tubarao Azul field.
OGX fell 3.2 percent to 6.10 reais in Sao Paulo after gaining 15 percent yesterday. The stock fell to a record low of 5.05 reais on June 28.
“A lot of people are saying he will probably come out and buy shares in OGX -- he’s done it before,” Adriano Pires, head of the Brazilian Center for Infrastructure, said in a telephone interview from Rio de Janeiro. Batista “could also find a partner for OGX because he has said many times he was negotiating a stake in OGX with the Chinese and others.”
OGX doesn’t need to seek funding at this time, Monteiro said in an e-mailed response to questions. The total amount of wells OGX needs to drill at Tubarao Azul depends on conditions at the reservoir, he said, adding that the lower-than-expected production estimates only apply to the first two wells.
Batista, speaking on the June 27 conference call, underscored that his EBX Group, which controls OGX, has $9 billion in cash.
“That’s a nice cushion,” Anisa Redman, an oil analyst at HSBC Holdings Plc, said in a telephone interview from New York. OGX fields in the offshore Campos Basin are “less risky,” she said, because “the track record at Campos from Petrobras and other players has been pretty strong.”
OGX’s main discoveries are in the Campos Basin, home to about 80 percent of Brazil’s oil production, where state- controlled Petroleo Brasileiro SA (PBR:US) is the biggest producer.
Suppliers including Schlumberger Ltd. (SLB:US), Baker Hughes Inc. (BHI:US) and Wellstream Holdings Plc, which provided goods and services for OGX’s first group of wells in Campos, stand to benefit from the larger number of production wells the company needs, Auro Rozenbaum, an analyst at Banco Bradesco SA, said in a telephone interview from Sao Paulo.
Last year OGX told investors its wells in the Campos Basin would produce as much as 20,000 barrels a day, about six times average production in the region, because its reservoirs had higher permeability than those where Petrobras has been pumping since 1977. OGX said on June 26 that production at its first two wells stabilized at 5,000 barrels a day each, 75 percent below the original estimates.
Shares plunged in the two days after the results put OGX’s short- and long-term production targets in doubt.
OGX will produce less than a third of its original target of 730,000 barrels a day in 2015, UBS analyst Lilyanna Yang said in a note to clients on June 29. Yang cut her 2015 target to 226,000 barrels a day and reduced her rating on OGX to neutral from buy.
OGX will increase the number of individual wells it connects to each of its floating, production, storage and offloading units, or FPSOs, to reach capacity at each vessel, Batista said on the call. The company plans to produce 250,000 barrels a day from the first three FPSOs, Batista said.
Monteiro declined to comment on long-term production targets during the conference call, and the company didn’t include any targets in its most recent presentation on June 26. OGX had previously said it would reach production of 730,000 barrels a day in 2015 and 1.38 million barrels a day in 2019.
While HSBC’s Redman expects output to fall as much as 40 percent short of OGX’s original expectations, the company may eventually reach more than 1 million barrels of oil a day.
“Asset wise, Campos Basin is capable of producing that,” she said. “It depends on equipment.”
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