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Dust to dust

6 Jan 2014 By Christopher Swann

It’s hard to find a phoenix in the ashes of Eike Batista’s empire. There are real assets buried under the tycoon’s collapsed EBX Group. Even so, the onetime flagship energy explorer will emerge with poor growth prospects. Investors have already priced in big things for the port and electricity arms. And too much depends on a resurgent Brazilian economy.

On its face, Oleo e Gas formerly known as OGX, should fetch more than its $325 million market value. At $6 a barrel of probable reserves, its sole functioning oil field should be worth at least $500 million. Another field, for which OGX paid $270 million, is expected to start production this month. With wells so young, though, disappointments remain a concern. After all, downwardly revised output forecasts from the Tubarao Azul field in 2012 were a big part of Batista’s downfall.

The new ownership structure also won’t help much. About 90 percent of the Oleo e Gas equity will be held by former creditors. They’ll probably be eager to recover their money and get out, leaving an overhang on the stock.

The shipbuilder OSX also has grim post-bankruptcy prospects. It was shortchanged by the OGX insolvency, exchanging the $1.5 billion it was owed for a 7 percent stake in the new Oleo e Gas. To be fully repaid, the oil company’s value would need to increase by more than 60-fold.

The more stable pieces of Batista’s former group, meanwhile, look too pricey. Prumo Logistica, the port company once called LLX, trades on an enterprise value of 15 times 2016 earnings before interest, taxes, depreciation and amortization, compared to just six times for rival Santos Brasil Participacoes. Yet Prumo Logisitica has lost important tenants, including steelmaker Ternium. Finding replacements could be tough given the nation’s weakening prospects. Economists polled by the domestic central bank expect Brazil’s GDP to grow by just 2 percent in 2014.

Similarly, electric utility Eneva, once MPX, is valued at nearly 10 times 2014 EBITDA, roughly twice its peers. It’s tempting to think there might be investment opportunities in a $2.5 billion collection of companies in solid industries and a trendy country that were worth $60 billion just a few years ago. Even with Batista’s reduced role, though, there’s no obvious upside.


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