ANALYSIS-OGX nears reckoning as bonds catch up with stock slump
* Shareholders ran for the exits at first signs of trouble
* Batista relying on asset sales, new capital to save OGX
* Still unclear who may eventually purchase, save the firm
SAO PAULO, July 3 (Reuters) - For months, it was a mystery why bond and stock investors had differing views about the fate of Brazil's OGX Petróleo e Gas Participações SA. As things unravel for the embattled oil company and its billionaire owner Eike Batista, those views are finally converging.
In the 12 months through March, shares of OGX sank 72 percent as the company repeatedly missed output goals, while bond prices held up at about 80 cents on the dollar. In other words, while equity investors judged OGX almost worthless, Pacific Investment Management Co and other bond funds increased bets the company would produce enough oil to honor its debt.
Since April, however, that gap has narrowed as concerns of a default led bondholders to look at OGX with the same eyes as stock investors. By Wednesday, the OGX bond due in 2022 traded at a near record-low 20 cents.
The grim consensus comes as investors bet OGX is nearing a day of reckoning. Batista's promise of a more agile rival to state-run Petróleo Brasileiro SA, or Petrobras, made OGX's 2008 initial public offering a success. Now, Barclays Plc is questioning the "viability of OGX's business," and Deutsche Bank Securities says a debt restructuring is an option.
All eyes are on Batista, a flamboyant billionaire whose Grupo EBX conglomerate of mining, energy and logistics companies once symbolized Brazil's rise to global prominence and is now a reflection of the nation's woes. Batista has stayed out of the public eye in the wake of a $20 billion drop in his fortune that knocked him from the top of Brazil's wealth list this year.
"This has become a question of prestige," said Jean-Dominique Butikofer, who oversees $2.5 billion in bonds at UBP in Zurich. Weighing the company's fate, he said, "for the time being, I haven't seen a crystal-clear, medium-term strategy."
A spokeswoman for OGX in Rio de Janeiro declined to comment on price trends for the company's bonds and stocks. Calls to the press office of EBX were not returned.
To be sure, Batista still has options to save the company, such as selling stakes in offshore fields including Tubarão Martelo, Parnaiba and BS-4.
And a deal with Malaysia's Petroliam Nasional Bhd by which OGX will be paid $850 million for a stake in two oil blocs may give the company some breathing room. A pledge by Batista to buy up to $1 billion of OGX stock by April next year, which markets have dubbed the "Eike's put option," remains a valid alternative at this point, the OGX spokeswoman said.
But those two alternatives could buy Batista and OGX only so much time, said Itaú BBA analyst Paula Kovarsky. Batista's recent sale of stock below the strike price for the put option fanned speculation that he lacks the money to honor his promise.
OGX currently bears the third-largest risk of default in a global index of 32,000 companies tracked by Kamakura Corp's Troubled Company Index. OGX, which had about $4.7 billion in debt at the end last year, has $1.1 billion in cash to pay a combined $940 million it owes shipbuilder OSX Brasil SA , which also is a member of Grupo EBX, oil regulator ANP and bondholders, Credit Suisse estimates.
"Though the company continued to tout the put option as remaining a viable option, it seems nearly impossible to us for the company not to restructure its debt," Nomura International analysts led by Alex Monroy wrote on Tuesday. "This suggests that if the company is intending to conduct a restructuring, it should be moving relatively quickly in that respect."
With a growing imbalance between assets and liabilities, dwindling cash and limited fundraising options, investors see little value in OGX stocks and bonds. They worry that worsening market conditions have left Batista unable to persuade potential partners, the government or creditors to help him save OGX.
The six-year-old company is struggling to turn offshore discoveries into producing fields. Output from the Tubarão Azul offshore field has disappointed since drilling began in 2012, fanning concerns that OGX will lack the cash to finance ships and investments, drill new wells and pay debt.
"The problem with OGX is that management failed to find the oil that could generate the revenue needed to pay for operations," said David Epstein, managing director at research firm CRT Capital Group LLC in Stamford, Connecticut.
As Batista's flagship company falls from grace, it has come to represent the broader risks facing Brazil.
Latin America's biggest economy attracted waves of foreign capital during a decade-long commodity boom, but investors and citizens have complained of poor management and wasteful spending during the bonanza as prices for raw materials retreat.
Worries about OGX helped trigger a rout in the benchmark Bovespa stock index on Tuesday to a four-year low.
"THE LAST STRAW"
Bond prices had found support due to huge purchases by Pimco, the world's largest bond fund, which amassed a nearly $450 million position in OGX bonds as of the first quarter, Thomson Reuters data showed. That vote of confidence failed to stem the price slump as smaller funds made for the exit in early April.
For a while, bonds took longer to react to OGX's dreadful headlines than shares because bondholders were confident they would be ahead of other creditors in line for repayment. But concerns that state-run lenders could win priority over private investors in a credit event dented that confidence.
Calls to Brigitte Posch, a senior emerging market debt manager at Pimco in Frankfurt, and the company's press office in Newport Beach, California, were not immediately answered.
In recent weeks, the market talk shifted from OGX's disappointing output to a hypothetical scenario of default or even liquidation. A Credit Suisse Securities report on Tuesday was titled "What is left for the shareholder?" Another note from HSBC Securities was called "The Last Straw?"
According to Barclays analyst Chris Buck, bond prices are failing to attract buyers despite trading at less than one-fifth their face value. Liabilities could surge in a default event, and current bondholders run the risk of losing all their money, he said in a report.
Bondholders are now focused on estimating OGX's "residual value," commonly defined as the value of an asset after events like bankruptcy or liquidation. "In case of default, the only thing that matters is the residual value," UBP's Butikofer said.
Brazil's government also has little room to help Batista's struggling companies, especially in the wake of street protests demanding more spending on basic services. Some of Brazil's main banks have seen their exposure to Grupo EBX surge after lining up more than $5 billion in loans, according to estimates by Bank of America Merrill Lynch.
"I sincerely don't see a buyer for the company as a whole," CRT's Epstein said, referring to OGX.
(Additional reporting by Jeb Blount in Rio de Janeiro and Brad Haynes in São Paulo; Editing by Todd Benson and Andrea Ricci)