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Is There Any Value in OGX's Shares?

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Fede Zaldua
Oct 04, 2013
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Eike Batista's spectacular fall from the billionaire’s list is not the only outcome from the fall of his energy and infrastructure Brazilian empire. The shares of his flagship oil company OGX Petroleo e Gas Participacoes (OGXPY, Financial), which have fallen more than 95% year-to-date, have made investors across the world lose billions. The problem is simple: The company has an outstanding debt of more than $3.6 billion, which is substantially more than the value of all the company's assets. As a matter of fact, Credit Suisse's analysts estimate the value of OGX's assets to be around $1.9 billion. That said, a successful re-structuring of OGX's debt could leave some value left for currently existing shareholders.

Exercising an Outstanding Put Option

If OGX does exercise the $1.0 billion put option it has against its biggest shareholder, the company could gain time to re-negotiate its debt in order to get better conditions for the rest of its current owners. Out of the $1 billion, $100 million would be injected immediately and the remaining $900 million as the company needs it. Even when I have doubts about Eike's ability to honor the remaining $900 million, one $100 million deposit would boost the company's assets by more than 30% of today's total market capitalization (at $330 million).

The Coming Re-structuring

I am inclined to think that current relevant bondholders such as BlackRock (BLK, Financial) will not ask for a full liquidation of the company. Mainly because they could recover a higher percentage of their investment through agreeing to fair re-structuring terms. Here are the two re-structuring options that are currently being contemplated by most analysts.

1) Simple liquidation. This would leave equity holders with zero value. In this case (and this is extremely relevant) the value left for the bondholders depends on whether a deal with Petronas would happen or not. If there is a deal and bondholders force OGX's liquidation, bondholders would let go a relevant amount of assets (40% of Tubarao Martelo and 20% of BS-4 would go to Petronas). In the that case a deal is not reached, bondholders would have 100% of all assets, but monetizing those assets under distressed conditions would come at a huge cost. For this reason, I think that bondholders will agree to a bonds-to-equity conversion.

2) Conversion of bond to equity. If the proportion of $330 million market cap and $3.6 billion of bonds is kept, bondholders would retain 91.6% of the assets (since today's implied enterprise value is equal to $3.93 billion). This implies that bondholders would immediately recover 48% of their initial value (91% of a total asset value of $1.9 billion).In this case, the book value left for shareholders is 8.4% of the total current asset base, which is equal to $160 million. That said, OGX's financial flexibility would be remarkably better off since the company would be freed from $300 million of interest payments per year.

Bottom Line

I think there is some value left for OGX's current shareholders but I do not think the current margin of safety is big enough. I would go long if and only if the company's market capitalization goes below $160 million (half today's price). The reason? In the case a bond-for-equity conversion takes place, I do not think bondholders would agree on a total enterprise value greater than $4 billion.
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