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Brazilian equities: The OGX effect

If Petrobras is considering an equity transaction in 2014, the implosion of Eike Batista’s OGX group this year won’t be helpful for investors’ perceptions of the risk of Brazil’s oil exploration and production industry.

The oil and gas company, launched in 2007 by Brazilian entrepreneur Eike Batista, which raised $1.3 billion in November 2007, has had a dramatic and very public collapse, entering bankruptcy in October this year and delisting from the Bovespa in November. Since October 2010 the company’s market capitalization has fallen by more than $45 billion, with a negative impact on the equity portfolios of many international investors that had bought into the Brazil pre-salt-layer oil discovery growth story. However, investors’ losses could have been worse.

Cesar Dias Ramos, now CEO of Momentum Energia, was formerly president of Perenco Petróleo e Gás. French oil company Perenco came very close to listing its Brazilian subsidiary in a deal that would have had a similar fate to OGX, if less dramatic in terms of size. "We tried an IPO [aiming to raise just over $500 million] of the company in 2011," says Dias Ramos. "We had a 50% participation in five offshore blocks in the Espírito Santo basin; the other 50% was owned by OGX. At that time OGX was a successful example of an IPO. It had achieved a valuation of more than $3 a barrel of prospective reserves.

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