Fitch: Use of Proceeds From OGX's Put Option Could Swing Credit Quality
OGX Petroleo e Gas Participacoes S.A.'s (OGX) recently announced put option could have either a negative or positive effect on the company's credit quality depending on what it decides to do with the proceeds, according to Fitch Ratings.
On Oct. 24, OGX's controlling shareholder granted the company the right to demand the subscription of new common shares, up to the equivalent of US$1 billion. Fitch believes the addition of the put option is neutral to OGX's credit quality. The option expires on April 30, 2014, and the price per share has been set at Reais 6.30 (slightly above the current market price).
If exercised, Fitch believes the impact on the company's credit quality could swing in either direction ultimately dependent on how the proceeds are used. It would be negative for credit quality if the proceeds are invested to acquire new undeveloped reserves that could add to capital expenditures requirements which would likely delay any increase in cash flow generation. Conversely, if the proceeds are used to accelerate production and ramp up cash flow generation more rapidly, that would be positive for credit quality. Fitch notes that the put option can only be exercised in the event that favorable financing options are not available.
In July 2012, Fitch downgraded OGX's foreign currency Issuer Default Rating to 'B' from 'B+', due to the significant reduction in expected production volumes that will delay OGX from becoming cash flow positive and will prolong its deleveraging process. Fitch also recognizes that OGX has pre-funded and secured the equipment for its capital expenditure program.
Additional information is available at 'www.fitchratings.com'.
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