A Name To Know In 2011: Brazil Billionaire Batista’s Oil-Rich OGX

29-Oct-2010

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Oct. 29 2010 – 8:01 am | 1,456 views | 0 recommendations | 2 comments
By CHRISTOPHER HELMAN

If you haven’t heard of it already, Brazilian oil company OGX is one to watch in 2011. Just not one to invest in. Sure, I could be totally wrong; OGX could find mammoth new oilfields where it’s drilling off the coast of Brazil, enough to justify its sky-high valuation on the Bovespa. But honestly, it’s time for a reality check here. Since going public in July 2008, at the height of the oil price bubble, OGX has soared to a market cap of roughly $41 billion.

On its face, the valuation of OGX is absurd. Investors somehow figure it is worth more than big U.S. oil independents like Apache Corp. ($36 billion market cap), Marathon Oil ($25 billion), Devon Energy ($28 billion) or Anadarko Petroleum ($31 billion). Yet OGX has minimal revenues, scant earnings, and as of yet, no oil or gas production whatsoever.

Billionaire Eike Batista owns roughly 60% of the company, worth some $25 billion. It’s the biggest contributor to his net worth, $27 billion at Forbes last count. (Check out my colleague Keren Blankfeld’s excellent profile of Batista here.) Batista’s aura (and OGX’s relatively limited public share float) contribute mightily to the company’s 66% share price run up in the past year.

Don’t get me wrong–OGX does have a host of good prospects, like onshore natural gas fields that could hold upwards of 10 trillion cubic feet, as well as roughly 2 million acres it’s been exploring to great success in the Santos and Campos basin’s off the coast of Brazil. In contrast to the ultradeep, sub-salt Brazilian oil finds of recent years (like the just announced 16 billion barrels in the Libra field), OGX’s newly discovered fields are located at relatively shallow depths. So far it’s found resources that could amount to as much as 6.7 billion barrels of oil and equivalent gas.

In recent weeks OGX has emphasized that it is seeking a partner to buy a minority stake in its most promising projects. Chief Executive Officer Paulo Mendonca has said that OGX is receiving plenty of interest from major oil companies (all the big guys except for BP). The Chinese might well be up for it: Sinopec bought 40% of Repsol’s Brazil assets for $7.1 billion in early October.

But unless new partners are willing to bid exceptionally high prices for a share in OGX finds, their entrance will necessarily dilute the positions of existing shareholders (and should promp a correction in shares). And think about it—over the next decade OGX is going to need to attract a lot of partners and a lot of new investment to build the pipelines and platforms needed to make its new fields flow. Assume that 5 billion barrels of its new finds are readily recoverable. Assume also that developing those fields will cost at least $10 per barrel. That’s $50 billion that OGX will need to raise–either from bond or stock sales, or from bringing in new partners—before it can turn that oil and gas into cash. And though Batista has been effective at poaching talent (like ceo Mendonca) from Petrobras, OGX has no organizational experience in developing big oil fields. OGX may have found these fields, but in time a good portion of the profits to be gleaned from their development will accrue to bigger, more experienced partners.

Batista is rightly proud of the success of his 3.5-year-old company. And the mix of technical and financial challenges that OGX will necessarily face in the years to come make it one of the most exciting companies to watch in the global oil patch.

But I’ll be watching for shares to correct as investors realize that for the price they’re paying for OGX they could instead (just as an example) acquire all the shares of Devon Energy (at 9 times earnings) plus assume all of Devon’s debt, and still have a few billion left over. Earlier this year Devon sold its Brazilian assets as part of a package deal to BP for $7 billion. Devon’s plan: take the cash and refocus on higher-returning projects in the U.S.


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