Market Overview

Fitch Expects to Rate OGX's Proposed US$1.1B Issuance 'B+(exp)/RR4'

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BUENOS AIRES, Argentina--(BUSINESS WIRE)--

Fitch Ratings expects to assign a 'B+(exp)/RR4' rating to OGX Petroleo e Gas Participacoes S.A.'s (OGX) US$1.1 billion proposed senior unsecured notes issuance due in 2022. The 'RR4' Recovery Rating on the issuance reflects an average expected recovery in the event of default. The notes will be issued through its wholly owned subsidiary, OGX AUSTRIA GMBH and will be unconditionally and irrevocably guaranteed by OGX, OGX Petroleo e Gas Ltda. and OGX Campos Petroleo e Gas S.A. The company expects to use the proceeds from the issuance to fund its capital expenditure program and for general corporate purposes. OGX has a Fitch foreign and local currency Issuer Default Rating (IDR) of 'B+', and a long-term national scale rating of 'BBB(bra)'.

The Rating Outlook is Stable.

OGX's ratings reflect the company's sizable and diversified oil and gas resources, its experienced management team, and its ability to execute the start-up of production from its shallow water Campos blocks using standard and proven technology. Primary concerns include the potential for a delay in incorporating proven reserves, unforeseen production delays that could result from delays in critical equipment delivery and/or lower-than-expected ramp-up of production volumes, and exposure to contracted, yet unlocked leasing fees for key production equipment. These factors could result in the need for additional financing for OGX over the medium term. Initially, production risk is mitigated to some extent as key equipment has been secured and procurement for additional equipment to meet production targets is in an advanced stage.

OGX is in the production start-up phase of the Campos basin - Waimea Complex, whose first oil was delivered on Jan. 31, 2012 through an extended well test (EWT). Production from this field was initially expected for October 2011, but production began within Fitch's expectations. OGX expects production volume at its first well to stabilize at approximately 10,000 to 13,000 barrels per day (bpd). Production volume is expected to ramp up to 40,000 bpd following the connection of two additional horizontal wells during the second half of 2012, after the declaration of commerciality for Waimea by the Brazilian National Oil Agency (ANP). Waimea's declaration of commerciality is expected during the first half of 2012. The initial production volume of up to 1.2 million barrels is to be sold to Shell in two shipments, at a USD5.5 discount to Brent, and are expected to be delivered in March 2012.

The company expects production to begin in a second area in Campos called Waikiki in the second half of 2013. By 2013, the company expects to have approximately 11 horizontal production wells, each producing approximately 10,000 - 20,000 barrels of oil equivalent per day (boe/d). OGX has secured the critical equipment needed, including six offshore rigs under contract and three floating, production, storage and off-loading facilities (FPSOs) to meet these goals. The first FPSO has been connected to Waimea's first producing well. The two additional FPSOs, OSX-2 and OSX-3, will be constructed in Singapore and are expected to be delivered in 2013. OSX-2 will be installed in the Waimea Complex, and OSX-3 will be installed in Waikiki.

While unproven production volumes and the start-up phase of oil production greatly add to OGX's business risk, the company's initial drilling campaign was highly successful and was focused on several of the Campos basin blocks. OGX's first drill stem test (DST) in the Santos basin was successful and indicated the presence of condensates that were not originally envisioned. The company plans to evaluate different alternatives to monetize the condensates for a potential positive impact in OGX's long-term cash flow, although it is difficult to quantify at this stage. In addition, the company recently confirmed the existence of a pre-salt reservoir in the shallow waters of the Santos basin, which further highlights the potential of this area.

Thus far, the exploratory campaign in the Espirito Santo basin was unsuccessful, with two dry wells, but OGX estimates there is potential in other parts of this area. The company has also begun its first DST in Parnaiba, where it is expected to ramp-up exploratory drilling in 2012, as the exploration period expires in March 2014. The company will also begin seismic shooting of its Colombian blocks. Following the completion of 83 exploration wells over the last four years, the overall success rate has been approximately 85% in all basins.

OGX has a very aggressive growth strategy that envisions growing production from 10,000 to 13,000 bpd today to over 730 thousand boe/d in approximately five years. This growth plan will require large capital investments to bring production on line. OGX's total investment program is sizable, ranging from USD3.5 billion to USD4.2 billion between 2012 and 2013. In its base case scenario, Fitch expects OGX to report negative free cash flow over the next three years. Future investment activities will be financed with USD3 billion of liquidity as of December 2011, USD0.3 billion from OGX Maranhao financing (concluded in January 2012), plus proceeds from the proposed USD1.1 billion debt issuance. The company's initial exploration, development and production activities have been fully financed with the proceeds from two equity issuances in 2007 and 2008 that totaled USD5.4 billion, and proceeds from a USD2.6 billion debt issuance in June 2011.

As of January 2012, OGX's pro forma debt was USD2.9 billion and includes a USD2.6 billion bond issued last June and USD320 million of OGX Maranhao financing. Following the proposed debt issuance, pro forma debt would increase to approximately USD3.9 billion, which is higher than initially anticipated by the company but is within Fitch's base case scenario. The incremental debt is related to changes in Waimea and Waikiki ramp-up strategy, and the potential to appraise Santos Basin shallow water pre-salt discoveries while maintaining a cash cushion. Fitch's net adjusted debt for operating leases will increase total adjusted obligations to slightly greater than USD10 billion by 2016. Leverage based on debt to proven reserves is expected to be below USD3 per barrel assuming 4 billion boe are proved out over the next few years. These estimates may vary depending on eventual production rates/levels, the level of proven reserves, and ultimately, crude prices.

Fitch estimates that as production ramps through 2013, leverage as measured by total adjusted debt to EBITDA, will decrease from non-meaningful levels today (no operating cash flow) to levels in the high single digits. Fitch expects leverage should substantially decline to below 4.0 times (x) after adjusting debt for operating leases in 2014 and 2015 as production comes on line and operating cash flow increases. Fitch also expects the vast majority of incremental total adjusted debt will be associated with operating leases for production equipment with affiliate company, OSX. Fitch projects EBITDA will grow to between USD6 billion-USD8 billion by 2015 using Fitch's published mid-cycle price deck and by applying significant discounts to management's production targets; Fitch's base case is significantly lower than management's expectations.

Catalysts for a negative rating action include a significant delay in bringing production online, coupled with lower than expected discovery levels and incorporating reserves, which could result in increased funding needs and a deterioration OGX's credit quality. A positive rating action could result from satisfactory production volumes, coupled with lower uncertainties regarding reserves.

Company Profile

OGX is a Brazilian Oil and Gas company created in 2007, 61.2% owned by EBX Group. OGX has a portfolio of 35 blocks, of which 30 are located in Brazil (22 are offshore) and five onshore blocks are in Colombia, covering an area of 44,000 square kilometers. In Brazil, OGX's blocks are located in the Campos, Santos, Espirito Santo, Para-Maranhao and Parnaiba Basins - covering an area of 31,500 square kilometers.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Oil and Gas Exploration and Production Companies' (April 5, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Oil and Gas Exploration and Production Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=645090

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Brian Bertsch, +1-212-908-0549
Media Relations, New York
brian.bertsch@fitchratings.com
or
Lead Analyst:
Ana Paula Ares, +54 11 5235 8121
Senior Director
Fitch Argentina Calificadora de Riesgo S.A.
Sarmiento 663, 7 floor, Buenos Aires
or
Secondary Analyst:
Lucas Aristizabal, +1-312-368-3260
Director
or
Committee Chair:
Daniel R. Kastholm, CFA, +1-312-368-2070
Managing Director

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