Fitch Downgrades OGX Rating to CCC. Outlook Negative

Fitch Ratings views OGX Petroleo e Gas Participacoes S.A.’s (OGX) decision to cease the development of its Turbarao Azul Field as neutral to negative for the company’s credit quality given the already sluggish production performance and tightening liquidity position.

On July 1, 2013, OGX announced its intention to suspend the development of this field due to technical limitations resulting from the compartmentalization of the formation, which makes it uneconomical to develop with today’s technologies. The reduction in anticipated production volumes due to the abandonment of Turbarao Azul Field will increase the company’s cash needs, as operational expenses are expected to remain largely unchanged while production volumes are reduced. Fitch currently rates OGX ‘CCC/CCC(bra)’, with a Negative Outlook.  CCC  : currently vulnerable and dependent on favorable economic conditions to meet its commitments1

OGX’s liquidity will be pressured by the lease obligations related to three floating, production, storage and offloading platforms (FPSOs), OSX-1, OSX-2, and OSX-3, while only one will actually be producing; OSX-3 at Turbarao Martelo Field. OSX-1 is currently connected to the three wells which production will be suspended. OSX-2 is expected to be delivered by year end and OGX will begin making lease payments for this unit in January 2014. These units could potentially be used by OGX in another location.

 Related: OGX Cancels FPSOs, Platforms Orders. Shares Drop to Record Low

OGX’s cash needs could be estimated at approximately USD300 million in 2014, assuming the full exercise of the put option, a capex of USD1.5 billion (including the USD449 million payment to OSX), and the collection from Petronas of USD250 million this year and USD500 million in 2014. The potential underperfomance of Turbarao Martelo Field (with a targeted level of 5,000 to 7,000 barrels per day), the unavailability of the put option and/or invoices from Petronas could pressure OGX’s credit quality.

OGX’s cash needs could be higher, if any of the above mentioned conditions do not materialize. OGX’s outstanding USD3.7 billion bonds limit the company’s ability to raise additional debt. The company could potentially recur to asset sales to cover any cash needs.

On June 14, 2013, Fitch downgraded OGX’s foreign currency Issuer Default Rating to ‘CCC’ from ‘B-‘, due to increased uncertainty about the willingness and ability of OGX controlling shareholder Eike Batista to honor the company’s USD1 billion put option. Funding for OGX’s capex program is vital to increasing oil production, so a default on the put option would further tighten the company’s liquidity position.