Abstract

The case is about Brazil-based business tycoon, Eike Batista (Batista), Chairman of the EBX Group (EBX), who was once among the richest people in the world. The flagship of the group was oil and gas company OGX Petroleo e Gas SA (OGX). There were several publicly held companies under EBX in the areas of mining (MMX), logistics (LLX), electricity and energy (MPX), shipbuilding, leasing, oil and gas services (OSX), and integrated mining project (CCX). All these companies were interlinked and depended heavily on each other. Batista’s fortunes rose after the government-owned oil company in Brazil, Petrobras, announced discovery of oil off the Southeast coast of Brazil, and OGX bid for exploration rights in 21 blocks. Surveys conducted by OGX showed that by 2015, oil output from the 51 prospects it planned to drill would be 730,000 b/d. In 2008, OGX went in for an IPO of US$ 4.1 billion, which was the largest in Brazilian history. Looking to benefit from the massive oil discoveries in the country, investors put their money into OGX. Over the next few years, OGX announced discovery of oil in several thousand square kilometers of blocks it owned offshore as well as onshore. By November 2009, Batista’s individual wealth was pegged at US$ 20 billion. From time to time, the company announced the discovery of oil and progress in its oilfields. These helped in creating positive vibes about OGX and its future prospects, increasing its share price. Along with OGX, all the other companies of the group were also being developed by Batista. LLX was developing Açu Superport, which was to one of the largest ports in the world. OSX had built platforms and rigs to be used by OGX while iron ore mined by MMX was to be converted into steel at Açu Superport and used by OSX. Power was supplied by MPX and the coal for the power was supplied by CCX. In March 2012, an investment company based in Abu Dhabi bought preference shares in investment vehicles owned by Batista. After the deal, Batista’s net worth increased to US$ 34.5 billion, placing him seventh on the List of Forbes’ billionaires. At that time, Batista was all set to become the richest person in the world. But within the next few months, Batista’s fortune took a dramatic turn for the worse. In June 2012, OGX announced that its output targets would be lower than its previous projections. After the announcement, the stock dropped by 25%. The problems had a ripple effect on the other companies in the group. In the next two quarters, OGX reported losses and the stock price was eroded by 68% during the year. The average production started to drop in the next few months. The debt of OGX and other companies continued to grow, raising concerns about the companies’ ability to meet growing capital expenditure. In July 2013, OGX announced that production in its only active field would stop by 2014, and three other fields on which the company was relying were not commercially viable. The National Petroleum Agency in Brazil said OGX needed to submit financial guarantees to drill oil blocks. To extricate his companies from these problems, Batista sold shares in OGX, thereby reducing his stake to 59%. A 40% stake in Tubarão Martelo field, which was to start producing oil at the end of 2013, was sold to Malaysia-based Petronas while a 29.3% stake in MPX was sold to Germany-based E.ON. The controlling stake in LLX was to be sold to a US-based company. However, Batista continued to mire in trouble as all the projects needed more time to show results and more funds as they were in the early stages of execution. By August 2013, the EBX Group had an estimated US$ 11 billion debt and assets of US$ 5 billion. With cash reserves in OGX less than the quarterly expenditure, Batista needed funds to keep the company going. Further funds were needed to meet bond interest payments. With several investment banks saying that OGX’s value was close to zero, Batista’s options appear limited.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Conduct strategic analysis of a company
• Assess the external environment and how it affects companies
• Evaluate the resources and capabilities of the company
• Understand strategy in multi-business unit firms.
• Examine the reasons for the downfall of companies

Keywords

Eike Batista, OGX, EBX, Forbe’s Billionaires, net worth, Brazil Economy, oil fields, MPX, MMX, OSX, IPO, Açu Superport, bankruptcy, put option, debt, sale of assets, divestment