Brazilian Energy Company OGX Files for Bankruptcy

Ricardo Moraes/Reuters

SÃO PAULO, Brazil - The flagship company of the Brazilian entrepreneur Eike Batista, the petroleum company OGX, filed for bankruptcy on Wednesday via a court-supervised restructuring.

The filing was a stunning fall for Mr. Batista, who was once a symbol of Brazil's rapid rise as a global economic power. The move became nearly certain after OGX missed a $45 million bond payment on Oct. 1. As of that date, OGX had 30 days to negotiate with creditors.

According to papers filed with the Court of Justice of Rio de Janeiro, the company's total debt is 11.2 billion reais ($5.1 billion), making this filing the largest corporate default in the history of Latin America.

The company owes $3.6 billion to bondholders, most of whom are foreign, with the rest of the debt to suppliers and banks.

Pimco, the world's largest bond investor, and BlackRock, the world's largest asset manager, both invested in OGX and stand to lose from any bankruptcy filing.

Even after a filing, the process could be long and tortuous. Of the approximately 4,000 companies that have entered court-supervised restructuring since the procedure was established in Brazil in 2005, only about 1 percent have successfully left the bankruptcy court's supervision, according to a study by the newspaper O Estado de São Paulo.

Only 23 percent even managed the first step, which is to have a creditors' assembly approve the restructuring plan. Many cases are fought over in Brazil's notoriously slow justice system, where appeals can drag on for years.

OGX has pursued many active discussions to try to stave off bankruptcy. Rumors have swirled about possible new investors in the company, especially after the firm dismissed its chief executive officer and chief legal counsel on Oct. 15.

OGX confirmed on Oct. 17 that it was talking to the Brazilian investment firm Vinci Partners and other firms about restructuring options, but no deal has yet been reached.

Its sister company OSX, whose primary business is building ships and marine architecture for OGX's petroleum exploration operations, said earlier this week in a note that it does not expect to seek a bankruptcy court's protection 'at this moment.' OSX's debts were listed in its balance sheet at $2.4 billion at the end of the second quarter, and it, too, has little cash flow. But unlike its sister company, OSX has easily marketable assets including oil rigs, and most of its short-term debts are with government-controlled banks that have already agreed to reschedule some payments.

Thomas Felsberg, a bankruptcy lawyer in São Paulo, said Brazilian bankruptcy courts almost always approve a company's initial request for protection, as long as the documents are in order, and such approval does not contain any judgment about a company's chances of emerging from bankruptcy.

If the request is approved, the company has a 180-day stay period in which it is protected from creditors' demands.

Documents released on Tuesday on OGX's website indicate that the company will run out of cash in December and needs $250 million in new funds to continue operations through April 2014.

These funds could come from selling its natural gas subsidiary OGX Maranhão, and from a possible investment by the Malaysian petroleum company Petronas in one of OGX's offshore petroleum blocks, the company's documents said.

Mr. Batista won international fame for his plans to build an empire of energy, mining, and logistics companies. For several years OGX announced one petroleum find after another, and all six of his publicly traded companies saw their share prices soar on the São Paulo stock exchange. But none of the companies managed to become profitable in time to service their billions in debt.

Mr. Batista's personal worth, which at one point last year exceeded $30 billion, is now estimated at well under $1 billion. Minority shareholders in OGX are suing both the company and Mr. Batista for what may have been misleading statements about OGX's supposed petroleum finds and for possible instances of insider trading.

Brazil's securities regulator, known as the CVM, announced in September that it was investigating Mr. Batista and other senior managers of OGX for possible violations of disclosure rules.

Marcus Sequeira, Latin America petroleum analyst for Deutsche Bank, said that it was clear several years ago that OGX was not going to be as successful as hoped.

The company issued in April 2011 a report in which it claimed over 10 billion barrels in reserves. But to reach that number the company added together different kinds of reserves, most merely possible rather than confirmed or even probable.

Although this discrepancy was in the 2011 report for anyone to see, few paid attention to it, Mr. Sequeira said. 'It is the same in every bubble. At some point everyone only wants to hear the good news.'

Looking forward, Mr. Sequeira said he was 'not optimistic' about OGX's fate, since 'the resource base is clearly not as big as the company was saying.'

But since there is some oil in OGX's fields, Mr. Sequeira said it might be possible, if a new investor is found, for production to resume and bondholders eventually to get a portion of their money back, though shareholders would probably be wiped out.

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