OGX Austria GMBH -- Moody's changes OGX's rating outlook to negative
New York, July 03, 2012 -- Moody's Investors Service affirmed the B1 ratings of OGX Petróleo e Gás Participações S.A. (OGX) and OGX Austria GmbH and changed the rating outlook to negative from stable.
"The negative rating outlook reflects lower than expected performance from OGX's first two producing wells, negatively impacting cash flows and capital productivity," commented Gretchen French, Moody's Vice President. "OGX's latest setback follows higher debt levels and moderate project delays and cost increases incurred over the past year, which had already diminished flexibility within the B1 rating."
OGX recently announced the results of extended well tests on its first two production wells in the Tubarão Azul field (formerly known as the Waimea Accumulation). The production flow rate of the two wells, OGX-26 and OGX-68, have been restricted to 5,000 barrels of oil equivalent per day (boe/d), which is materially below management's original estimated range of 10,000 - 20,000 boe/d. The lower well performance highlights one of the many risks of bringing contingent oil and gas resources onto production. The main reason for the lower well productivity is a weaker than expected water drive in the reservoir and significant well interference between these first two wells. The compartmentalized and unpredictable nature of the carbonate reservoir could contribute to increased costs to fully develop the field.
OGX's position as an owner of world class hydrocarbon resources remains strong. However, the company's growth rates and returns have been negatively affected by reduced production rates from the initial wells, which will result in lower cash flow and debt capacity for future projects. Furthermore, if OGX is not able to successfully manage its funding needs, cash levels could materially decline by the end of 2013, resulting in constrained liquidity and potentially further reliance on debt funding.
A key consideration will be the results of the drilling of its third producing well in the Tubarão Azul field. Field-wide production is estimated to reach around 15,000 boe/d by year end 2012, far short of the previous expectations of nearly 40,000 boe/d. To address the expected cash flow shortfall, the company is reducing its exploration capital spending in 2013 and 2014 by about $2.1 billion, which will entail reducing its drilling rig commitments to three rigs from six currently and reducing seismic spending. However, the expected reduction in the drilling rig program will not be complete until the fourth quarter of 2013.
OGX's B1 rating could be downgraded if production levels decline, liquidity becomes constrained or debt levels materially rise in order to fund cash flow shortfalls. While unexpected over the near-term given the negative outlook, the B1 rating could be upgraded if OGX is successful in growing production (to over 20,000 barrels of oil equivalent per day) and has made substantial progress on the construction of the two additional FPSOs and wellhead platforms.
The principal methodology used in rating OGX was the Global Independent Exploration and Production Industry Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Based in Rio de Janeiro, Brazil, OGX is one of the largest independent exploration and production companies in Latin America.
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Gretchen French Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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