OGX Petroleo (OGXP3) & Gas Participacoes SA, the oil company controlled by former billionaire Eike Batista, could file for bankruptcy protection as soon as today, said a person with direct knowledge of the plans.
The filing for judicial recovery, as the proceedings are known in Brazil, would be done after the close of trading in Rio de Janeiro, where OGX is based, said the person, who asked not to be identified before documents are submitted. The board is yet to decide on the filing, OGX said in a regulatory filing today. An official at OGX’s Rio press office, who isn’t an authorized spokesperson, declined to comment on the plans.
The proceedings will put $3.6 billion of dollar bonds into default in Latin America’s largest corporate debt debacle and mark the final chapter in Batista’s demise as poster child for Brazilian entrepreneurialism. OGX will need creditors to approve a restructuring plan that is presented to the court to continue operations, said Leonardo Theon de Moraes, a bankruptcy lawyer at Sao Paulo-based Mussi, Sandri & Pimenta Advogados.
“If creditors don’t accept the business plan, OGX will have its judicial reorganization converted into a bankruptcy process and a liquidation of assets,” Theon de Moraes said by telephone. “In a liquidation process the people who lose more are the shareholders.”
Discussions between OGX, which is running out of money to test its most promising field, and holders of bonds due in 2018 and 2022 concluded without any restructuring agreement, the Rio-based company said in a statement released yesterday. While Batista is yet to decide, his shipbuilder probably will also seek protection against creditors, the person said.
Batista became Brazil’s richest man after raising billions of dollars in equity markets and loans from a state bank to fund OGX’s drilling program and sister commodities startups. He then tapped debt markets, selling bonds to investors including BlackRock Inc. (BLK:US) and Pacific Investment Management Co.
Bankruptcy would culminate a 16-month decline that wiped out more than $30 billion of Batista’s fortune after offshore deposits he had valued at $1 trillion turned out to be duds.
Shares of OGX, which Batista founded in 2007, lost 96 percent in the past 12 months, the worst-performing stock among 73 members of the Brazilian benchmark Ibovespa Index. The stock dropped 26 percent to a record low 17 centavos at 11:08 a.m. in Sao Paulo. Companies that file for bankruptcy protection will have shares suspended, the Brazilian exchange operator said in a statement last month.
Batista asked bondholders to convert debt into equity, diluting his role in the company, two people with direct knowledge of the matter said Sept. 9. OGX’s $2.56 billion in bonds due in 2018 trade at 8.15 cents on the dollar.
“What the market is telling me is they don’t have a lot of faith even for bond holders to get money back,” Robbert Van Batenburg, director of market strategy at Newedge Group in New York, said by phone. “There’s a risk of a spillover - whether creditors are trying to pursue legal actions against other companies in Batista’s group.”
OGX continues to review debt restructuring options, it said in yesterday’s statement. The company, which expects to run out of cash in the last week of December, needs about $250 million to sustain operations through April, it said in an Oct. 23 presentation to Rothschild, the adviser hired by bondholders.
“New capital from either debt or equity financing is required to bridge near-term liquidity in the first quarter of 2014,” OGX said in the presentation posted yesterday on its website. “OGX is evaluating a number of farm-out opportunities to fully fund the mid- to long-term business plan.”
The company’s cash fell to about $82 million at the end of September, it said in a separate document dated Oct. 7 and posted on its website yesterday.
OGX has an enterprise value of $2.72 billion in a “base case operating model”, the company said. That’s more than seven times OGX’s market value of 776.6 million reais ($357 million).
The company has been building arrears with suppliers. Diamond Offshore Drilling Inc. (DO:US), a rig supplier to OGX, said Oct. 24 it wrote off $58 million from second and third quarter earnings on missed payments. Ensco Plc (ESV:US), another supplier, said on the same day that OGX’s “deteriorating” financial situation curbed its third-quarter profit.
“Payments are only made to critical vendors who currently perform services at the Martelo field to get first oil production up and running,” OGX said in the Oct. 7 document, titled “Project Olympic.”
The suppliers claims amount to $546 million, OGX said in a September presentation also posted on its website yesterday.
The oil company missed a $45 million payment on Oct. 1, prompting Standard & Poor’s to assign a default rating to $1 billion of bonds. Moody’s Investors Service and Fitch Ratings are giving OGX the 30-day grace period before calling a default. The grace period expires tomorrow.
Earlier this month, two people with direct knowledge said OGX was considering filing for bankruptcy protection late October or early November. Once a judge accepts a filing, the company would have 60 days to present a restructuring plan.
OGX risks having the country’s oil regulator revoke its 30 oil and natural gas licenses in Brazil if it files for bankruptcy, according to Sao Paulo-based TozziniFreire Advogados, a law firm that has clients in the oil industry.
The oil regulator, known as ANP, said by e-mail yesterday that the company would be allowed to keep its blocks under bankruptcy protection provided it has the funds to operate them.
To contact the reporters on this story: Cristiane Lucchesi in Sao Paulo at firstname.lastname@example.org; Peter Millard in Rio de Janeiro at email@example.com; Juan Pablo Spinetto in Rio de Janeiro at firstname.lastname@example.org
To contact the editor responsible for this story: James Attwood at email@example.com