Billionaire Eike Batista is pledging as much as $2 billion to shore up the finances of his oil and shipbuilding companies after drilling and output delays.
The controlling investor is granting OGX a put option that could require him to buy as much as $1 billion of new stock at a 36 percent premium. He will also buy up to $1 billion of stock in shipbuilder OSX Brasil SA (OSXB3) for 39.38 reais each, more than triple yesterday’s closing price.
Batista, 55, is attempting to ease concern the companies will run out of cash as OGX transforms itself from a startup with low costs and no output to an off-shore oil producer, according to Henrique de la Rocque, a portfolio manager at Brasif Gestao de Recursos. Batista’s net worth plunged by almost 50 percent since March to $19.6 billion yesterday after drilling and output delays caused stocks of his companies to tumble, threatening his title as Brazil’s richest man.
“There is a crisis of confidence -- people used to buy everything he sold, they believed a lot in the potential of the things he did,” de la Rocque said in a telephone interview from Rio de Janeiro. “After all the disappointments people had, I think this injection is good. There was a need for something positive to happen for investors to start gaining trust again.”
OGX dropped 1.7 percent to 4.67 reais at 3:07 p.m. in Sao Paulo. The shares rose as much as 8.2 percent yesterday, the most since July 27, as trading volumes surged to 68.6 million transactions, more than double the average for the past three months. Yesterday’s rise pared its year-to-date loss to 65 percent before today. OSX, which is building production vessels for OGX, slid 3.8 percent today.
Cirque du Soleil
Batista, the son of a former Vale SA (VALE5) chief executive officer, amassed his fortune by selling shares of linked commodity startup companies to the public. Before this week’s announcements, he had poured at least 4 billion reais ($1.97 billion) back into his companies over the past six years, while receiving in return just one dividend payment -- 36.8 million reais from MPX Energia SA in 2009. That’s drained his cash as he pursues ventures ranging from gold to coal to promoting Cirque du Soleil shows.
As part of the accord with OGX announced this week, the oil company will have the right to exercise its put option anytime through April 2014 should it need additional capital and can’t find more favorable financing, according to a regulatory filing. Batista would buy the shares for 6.30 reais each.
The move gives OGX additional firepower to compete for new exploration blocks that Brazil plans to auction as early as May in the so-called Round 11, Chief Financial Officer Roberto Monteiro said in an interview yesterday. OGX is also interested in buying exploration properties from other companies, he said.
“This put option will kick in in case we need to enhance our portfolio,” Monteiro said by telephone from Rio de Janeiro. “It’s free insurance that the main shareholder has granted to us at zero price, and this is mainly because of the confidence he has in the assets and the technical team and the opportunities he’s foreseeing that will arise in the near future.”
Statoil ASA, Royal Dutch Shell Plc and BP Plc are also planning to compete in the auction, where the government is offering 174 exploration tracts on land and off the coast of northeastern Brazil. OGX is already developing natural gas fields in the Parnaiba Basin near the auction areas. Sinochem Group’s purchase of stakes in five deep water blocks from Perenco SA, first announced in January, underscores the expansion opportunities in Brazil, Monteiro said.
“This market is very, very active,” he said. “If we get undeveloped assets and then put them into production we can add a lot of value.”
Shipbuilder OSX had the option to sell Batista shares valued at $1 billion under terms of its initial public offering in March 2010. The Rio de Janeiro-based company said in a regulatory filing the billionaire plans to buy $500 million of voting stock by March and another $500 million within a year.
While Batista’s cash guarantee is a positive step, it may not be enough to stem recent share losses, said Rogerio Freitas, a partner at Rio-based hedge fund Teorica Investimentos.
The oil exploration company began reducing its drilling fleet in Brazil to decrease exploration activities and focus on discoveries already made. Chief Executive Officer Paulo Mendonca left in June shortly after OGX slashed some output targets by as much as 75 percent.
“The company needs to show good production numbers, period,” Freitas said by telephone from Rio. “It needs positive cash flow. That’s more important than the put.”
Yesterday’s stock rally shows investors responded positively to Batista’s move.
“The plan is brilliant for Eike and OGX shareholders,” Laurence Balter, who oversees $100 million including OGX shares at Oracle Investment Research in Fox Island, Washington, said in an e-mailed response to questions. “For him, it’s a free call option on the future growth. For shareholders, he is putting his money where his mouth is.”
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