OGX shareholders should be used to violent swings in the market by now. Shares in Eike Batista’s oil company are down more than 90 per cent this year. However, even by OGX standards, the last few days have been a rollercoaster for investors.
The stock gained as much as 49 per cent on Friday after OGX exercised a put option under which Batista would begin to pump as much as $1bn into the company through the purchase of new shares. On Monday shares fell over 17 per cent after Batista contested the decision to exercise the put.
So what on earth is going on?
Here’s a timeline of the tale of OGX’s mysterious $1bn put option or, as Brazilian investors have started to call it, “a Put que pariu” – in reference to a local swearword:
24th October 2012 – OGX announces Batista has granted it the right to demand the subscription of new OGX common shares at a price per share of R$6.30, limited to $1bn. Under the agreement, OGX can only exercise the option if the company needs additional capital and there are no other more favourable alternatives. The decision will be “determined by the majority of the independent board members on the Company’s Board of Directors”. The option will expire on 30th April 2014. It is viewed as a sign of Eike’s confidence in the company and as a form of insurance for investors.
10th June 2013 – Batista announces he has sold shares in OGX for the first time, raising fears that the put option will not be honoured (since it would require Batista to buy shares at more than three times the price he has just sold them for).
21st June 2013 – Pedro Malan, Rodolpho Tourinho Neto, a former mining minister, and Ellen Gracie Northfleet, a former Supreme Court judge, quit as independent board members of OGX with no explanation.
1st July 2013 – Brazil’s market regulator, CVM, opens an investigation into OGX’s put option, giving no further details. The inquiry is ongoing.
10th July 2013 – Samir Zraick and Luiz do Amaral de França Pereira, OGX’s only remaining independent board members, also quit with no explanation.
4th August 2013 – Representatives of a group of around 60 minority shareholders tell the FT they are planning legal action against Batista and OGX’s independent board members. They accuse the latter of negligence for not exercising the put option.
2nd September 2013 – Forbes estimates Batista is now worth less than $900m.
6th September 2013 – OGX announces that the directors of the company have exercised the put option. Under the agreement, Batista will immediately transfer $100m of his own money to the company via the purchase of new shares and transfer the remaining $900m as and when needed. Investors wonder where Batista will get this money.
6th September 2013 – Batista sends a letter to OGX contesting the decision to exercise the put, which is released to the market on 9th September. He says if the issue is not resolved in two months, he will take the case to the arbitration court at the stock exchange.
Aurélio Valporto, who is co-leading the group of investors planning to sue Batista, says he suspects Batista orchestrated the move to exercise and then contest the put option. By asking his directors to exercise the put, Batista exonerated the company and its former independent directors from any legal responsibility over the put. However, he knows it can be contested given that it was exercised by directors of the company, not independent board members as stipulated in the original agreement. (The company has had no independent board members since they all quit.)
More importantly, Batista gains at least an extra two months in which to restructure his group. And if he decides to take the case to arbitration, the case could drag on well past the option’s expiration date and get him out of meeting the obligation altogether. OGX did not respond to requests for comment over the allegations. Batista could not be reached for comment.
But where does this tale end? Fitch offered the following, rather concise, conclusion in a report on Monday, explaining why it has now downgraded OGX’s ratings to C from CCC.
“Absent a material capital infusion, OGX is likely to default on its debt in the near future.”