In response to reader interest, I am releasing the recent correspondence between a Seeking Alpha reader and myself regarding OGX Petróleo e Gás Participações S.A. (OTCPK:OGXPY).
March 13 at 3:51pm
Bom Dia! Richard: I have another thought that you might have a interest(knowledge) in ... ? Do you follow OGXPY? As you undoubtedly know this company has been beaten up something terrible. it was $10 - $11 dollars a share a couple of years ago. Now it,s $1.30+ As you know too ... OGX has some fabulous "proven" reserves that should be of value one of these days ...? With your background in O/G ... What's your thoughts on OGXPY? Has Batista lost his magic? Best Regards, Bill
My reply follows ...
Richard Berger March 13 at 11:56pm
OGXPY.PK share decline initially was triggered by rumors of health problems for Eike Batista. These rumors were never substantiated and indeed appear to be completely without basis. Nonetheless, the attention they brought to his holdings in his EBX Group of companies, including OGX, has resulted in some longer term effects. OGX is essentially a closely held corporation controlled by Batista directly owning about 67% of the shares and companies under his control holding another 30.6%. This totals a 97.6% ownership controlled by Batista. The company apparently is only public traded to provide Batista a valuation of his asset for his own purposes and in use as pledging as a guarantee against debt he may take on for his own unrelated business activities.
OGX went public in June 2008 with a $R6.7 billion offering (USD $ 3.35 billion at current exchange rates). third quarter 2012 saw the first oil production sales revenue on an average 9.4kboe/d at a price averaging $142/boe. Production will be rapidly increasing in 2013 with one of the 3 wells in its current producing field back online after a 1 month shut-in for submersible pump equipment replacement and the connection of several more completed wells to production. Late 2013 is forecast to begin significant gas sales from the company's 16 completed but currently unconnected wells. On the other hand, oil prices are only averaging $95/barrel now, a significant decrease from the $142/b received in 2012. OGX does not use hedging to lock in future prices and smooth out price fluctuations.
OGX plans $1.2 billion in expenditures for 2013 and only has current assets of $2.5 billion. The company has entered into an agreement with Batista which provides a put option essentially whereby the outside directors of OGX may make a determination that the company needs additional cash and can require Batista to provide up to USD $1 billion through the purchase of new shares at $R 6.30 per share. This agreement remains in effect through April 30, 2014.
This "PUT" agreement creates a drag on the company in that it may be dilutive to existing share hold equity. The size of such dilution is unclear since the strike price is in Brazilian Reals and the funds are in $USD and the exchange rate should the PUT be exercised is unknown (currently about $3.15/share USD).
Several important downward revisions to OGX estimated reserves have also led to large downward moves in the company share prices. These reductions not only lowered enterprise value but also lowered the confidence in continuing and future statements made by the company with regard to foreword looking results.
Most recently, just a few weeks ago, on February 27, 2013 Eike Batista denied rumors that the company was being sold to Petronas, a state-run Malaysian company. The uncertainties in relation to the company knocked down the company's stock prices on the market since then. The language of Batista's denial of these rumors that his stakes in several of his EBX Group are in negotiations to be sold was interesting. In his statement, Batista says that no agreement has been reached to sell all or any part of any of these companies. He significantly ignored denying the rumor that the negotiations themselves have taken place.
So, the key issues with OGXPY are:
1. It is very closely held with less than 2.4% of its shares floated in the open market to non-controlling interest shareholders.
2. This non-controlling percentage may be significantly reduced if the PUT is exercised. At current exchange rate it would result in another 317.5 million shares to controlling-interest holders. This is about 10% of the total outstanding shares.
3. With a current market cap of $ 3.92 billion and enterprise value of $ 6.91 billion, The PUT agreement providing for 10% of the outstanding shares (based on current exchange rates) does not appear to have any likelihood of being dilutive.
4. The PUT agreement price of $R6.70 (USD $3.15 currently) does put a upper limit on market share price if it is to remain non-dilutive.
5. The market appears to place a very low value on the shares due to the high percentage owned by controlling interests (virtually all controlled by Batista). This situation is unlikely to change for the better in the near future. The PUT option in fact would significantly increase the percentage held by Batista.
6. A possible sale by Batista to raise cash for his own goals separate from OGX are a drag on its shares in the market.
7. With extreme expenditures planned for the next several years in E&P to develop the company's proven reserves and bring them to market, there is virtually no chance of a dividend and a high likelihood of the need to raise additional funds to meet these needs for cash beyond what the production revenues will be able to supply.
8. OGX looks like a moderate risk gamble for the long term if oil prices remain near or above the $100/barrel price. The forecast for U.S. energy independence by 2016 makes this a risky assumption. As the importer of about 20% of the world's available export-market production, a withdrawal by the U.S. from these markets would likely cause a very significant price fall from the current market.
9. The commencement of production sales in third quarter 2012 along with expected large increases in production in 2013 may provide the news needed to arrest share price decline. The significantly lower price/barrel will offset this positive news to at least some degree.
My bottom line on OGX: Treat it like the penny stock it is. An intriguing speculative investment at these prices with far more long term upside potential than down.
Disclaimer: I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.