Bullish on Brazil: Billionaire Batista to Buy $1 Billion of Additional Shares of OSX

Updated: July 12, 2012 (Originally published March 18, 2012)

RIO DE JANEIRO -(Dow Jones)- Billionaire Brazilian businessman Eike Batista, the world’s seventh-richest person according to Forbes, doubled down on his bet that large oil fields discovered off the southeast coast of Brazil will lead to a flood of orders for production platforms and drilling rigs.

Batista and his Grupo EBX holding company plan to buy up to $1 billion in shares of shipbuilding and oilfield services company OSX Brasil SA (OSXB3.BR), part of his industrial empire that spans oil, coal, iron ore and logistics. While investors were aware of the possibility of a capital infusion at the time of OSX’s March 2010 initial public offering, Batista’s unusual and often brash style still has some scratching their heads at why the company needs additional cash just two years after raising $1.4 billion.

“Like every move to increase capital, there are some reservations among investors,” said Joao Pedro Brugger, who manages $100 million in securities at Brazil’s Leme Investment Fund and holds OSX Brasil shares. Despite his wariness about the deal, raising capital was an important move that reinforces OSX’s ability to invest, Brugger said.

OSX is positioning itself as a key player in the renaissance of Brazil’s shipbuilding industry, one of a series of new shipyards under construction to meet demand for oil platforms and drilling rigs the government wants built in the country. Oil companies operating in Brazil are obligated to use a certain percentage of locally produced goods and services under strict local content rules.

At the time of the IPO, OSX was able to raise enough cash to fund the company’s equity stake in five floating production storage and offloading vessels, or FPSOs, and two well-head platforms ordered by sister company OGX Petroleo e Gas Participacoes SA (OGXP3.BR, OGXPY). So Batista pledged an additional $1 billion in capital via a put option to be exercised when OGX made new orders for platforms.

“I would be more worried if he hadn’t decided to inject more capital [into OSX],” said one analyst, who declined to be named because he’s not authorized to speak with the press. “Without more capital, the company doesn’t have any way to grow.”

More important, OSX’s IPO likely would have flopped if investors knew that the company would need to issue more shares to grow in two years, the analyst explained. “There are no skeletons in the closet,” the analyst said. “Minority shareholders aren’t suffering any losses.”

OSX is using a 20% equity, 80% financing project-finance model that is relatively standard in the oil industry to build out its shipyard and each FPSO that it will own, operate and lease to OGX, Chief Financial Officer Roberto Monteiro said Thursday in an interview.

“Each one of these units will have a different project finance, where we put in 20% equity and we have to raise 80% in outside debt,” Monteiro said. Recent orders for 11 medium-range oil tankers and a pipe-laying vessel, however, are “cash-flow neutral” and won’t require the same type of 80-20 financing model, Monteiro said. OSX will receive incremental cash payments to continue the shipyard-specific orders as key construction milestones are reached, the executive explained.

“When are new orders from OGX going to come in? This is going to be a trigger for when this option is exercised,” Monteiro said. While Batista declined to talk specifics, he said in a conference call with investors that “absolutely” new platform orders are on the way. The put option will be exercised in two transactions: the first in the second half of 2012, followed by one in March 2013, Batista said.

OGX needs to have at least eight platforms operating in order to meet its 2015 production target of 730,000 barrels of crude per day, according to Credit Suisse analyst Emerson Leite. With five on order so far, Credit Suisse expects three more could be ordered yet in 2012.

–By Jeff Fick, Dow Jones Newswires

Copyright (c) 2012 Dow Jones & Company, Inc.

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