RIO DE JANEIRO & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded OGX Petroleo e Gas Participacoes S.A.'s (OGX) foreign and local currency Issuer Default Rating (IDR) to 'B-' from 'B' and its long-term National Scale rating to 'BB+(br)' from 'BBB-(br)'.
Fitch has also downgraded the rating of the company's USD2.6 billion and USD1.1 billion notes to 'B-/RR4' from 'B/RR4'. OGX's wholly owned subsidiary, OGX AUSTRIA GMBH, is the issuer of both notes. These notes are unconditionally and irrevocably guaranteed by OGX, OGX Petroleo e Gas Ltda. and OGX Campos Petroleo e Gas S.A.
The Rating Outlook has been revised to Negative from Stable.
KEY RATING DRIVERS
The rating downgrades reflect concern about OGX's liquidity due to its aggressive acquisition of 13 exploratory blocks during a time in which the company is implementing an aggressive investment program and is struggling to bring oil and gas production on line. The exploratory blocks acquisition is valued at approximately USD190 million and has to be paid upfront within the next few months. Committed minimum investments for these blocks amount to USD350 million in the five-year exploratory period, which will further pressure OGX's cash needs.
OGX continues to face operating challenges. During April, its three production wells were halted due to technical issues at the centrifugal submersible pump in well OGS-68HP, and unstable electrical generation at OSX-1 which affected the production in the other two wells. Of the three wells, one was very quickly put back into production. The second one is expected to restart production in May, and the third well in June.
As of March 31, 2013, OGX had USD4.0 billion of total debt and only USD1.1 billion of cash and marketable securities. OGX's ambitious capital expenditure program of approximately USD 1.3 billion in 2013 and low-to-negative EBITDA (depending upon the speed of recovery in production volumes) is expected to result in a large cash flow deficit during 2013.
Fitch believes there is a high likelihood that OGX will need to exercise a USD1 billion put option against its controlling shareholder in 2013 to fund a portion of its negative cash flow. The recent decision by the company to sell a 40% stake in blocks BCM-39 and BCM-40 to Petronas is positive, but is not large enough to address all of the company's funding needs. Upon the regulators' approval of such transaction, probably during the second half of 2013, OGX is expected to receive USD250 million. An additional USD500 million would be received following the beginning of production of oil in these blocks, which is anticipated to occur in the first quarter of 2014. OGX would receive subsequent payments upon reaching certain production volumes.
Following recent events, Fitch has adjusted the production volumes imbedded in its base case scenario to about 10,000 barrels of oil equivalent per day (boepd) in 2013; 46,000 boepd in 2014 and 94, 000 boepd in 2015. Considering Fitch's oil price deck, Fitch has reduced its EBITDA projection to approximately USD1.5 billion by 2015 from the previous 2 billion. Should production volumes materialize at the new indicated level, Fitch expects OGX to report negative free cash flow over the next three years, highlighting OGX's liquidity risk. In 2015, Fitch expects leverage to be about 4.0x, after adjusting debt for operating leases
RATING SENSITIVITIES
OGX's ratings may be downgraded if its liquidity risks continue to increase. If the company encounters additional execution issues with its exploratory and development plan, further negative rating actions could occur.
A positive rating action could result from satisfactory production volumes, coupled with lower uncertainties regarding reserves and liquidity.
OGX is a Brazilian oil and gas company created in 2007, 61.2% owned by EBX Group. OGX has a portfolio of 49 blocks in Brazil and Colombia. In Brazil, OGX's blocks are located in the Campos, Santos, Espirito Santo, Para-Maranhao and Parnaiba Basins.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Rating Oil and Gas Exploration and Production Companies' (Aug.9, 2012).
Applicable Criteria and Related Research
Rating Oil and Gas Production Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682334
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=791448
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