Friday, 4 October 2013

Batista: from zero to hero back to zero again

"Flamboyant Brazilian billionaire Eike Batista made his first million from gold trading before he was 24 years old.

And from there it was a life worthy of the silver screen — he married a Playboy model, entered speedboat contests, and amassed a fortune of $34.5 billion. Batista told everyone who would listen that he would soon be the richest man in the world.

That was the spring of 2012. Since then Batista has lost 99% of his wealth. His commodities empire, EBX, is on the verge of utter collapse. Creditors are calling, and this week Batista did not pay a $47 million interest payment on his oil and gas company's (OGX) bonds.

If he doesn't pay by Oct. 30, OGX will be the biggest corporate default in Latin American history."

The above from BusinessInsider's website, which continues:

"The main contributor to Batista's downfall was and is OGX, his oil and gas company. His fields simply did not produce as promised. In January 2012 OGX estimated production of 15,000 barrels of oil a day (not that great), then in May 2012, one of its fields dropped to 10,000 a day.

Then expectations for some fields fell even further, to 5,000 barrels a day, in June 2012."

From a letter he wrote:

"More than anyone, I wonder where I went wrong. What should I have done differently? A first question might be linked to the funding model I chose for the companies. Today, if I could go back in time, I would not have resorted to the stock market. I would have a structured private-equity firm that would allow me to create from scratch and develop over at least 10 years each company. And they would all remain private until I was sure that it was time to go public. In the projects that I conceived, time proved a vital stress factor for the reversal of expectations on companies bearing broadly satisfactory results and valuable assets.

What has happened since it became clear that OGX would not be able to deliver the results that once seemed possible to achieve? Have I suddenly become a reckless adventurer who marshals resources for his own benefit and does not care if I will deliver what I had advertised? Today it is hard to remember, but OGX was built by some of the crowned heads by decades of services to reputed companies. I did not invest in the oil industry without surrounding myself of those I and the market understood to be among the most skilled professionals one could find. When winning the fields it got, expectations around OGX were sky high.

I had offers to sell big stakes or even the control of OGX from a valuation of $30 billion. Two years ago, I put more than $1 billion out of my pocket in the company. I lost and have been losing billions of dollars with OGX. Does someone who wishes to mislead the other do so at a cost of billions of dollars? If I wanted, I could have performed a scheduled sale of $100 million every six months over 5 years. I would have pocketed $5 billion and still remain in control of OGX. But I did not. Who lost the most with the collapse in the value of OGX was one shareholder: Eike Batista. No one has lost as much as I did, and it is fitting that it be so."

The above text in bold reflects my own thoughts about SPAC's: companies should not go too early to the stock market, owners/managers should first develop the company over at least 10 years, proof it's worth, manage expectations with realistic projections, partially based on achievements so far.

The above story also shows there is no easy money in oil & gas, it is a very tough industry where Murphy's Law reigns supreme.

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