Brazil’s OGX Petroleo & Gas Participacoes SA, the flawed jewel of ex-billionaire Eike Batista’s EBX conglomerate, is one step closer to bankruptcy after missing a $45 million dollar debt payment that was due yesterday. If OGX goes under, its largest U.S. creditors, Pacific Investment Management Co. and BlackRock Inc., stand to lose millions in Latin America’s largest corporate default. Batista’s salesmanship and Brazil’s growth boom drew investors to his over-hyped companies. The warning signs they missed offer precious investing lessons.
1. Avoid companies no one understands. Batista’s EBX is a head-scratching maze of 13 interconnected startup companies, and only six of them are publicly listed. For instance, OGX was the main client of shipbuilding unit OSX Brasil SA. OSX in turn leased space from Batista’s port operator LLX Logistica, another sister company. As one company ran into trouble the others did as well. Even Batista’s employees couldn’t figure out the corporate puzzle. A company spokesman once confessed to having trouble keeping up with the new companies Batista created.
2. Beware shoddy transparency. The EBX holding company and six other unlisted units never disclosed their finances. These black-box businesses were impenetrable, making it hard to understand how their financial status affected the related, publicly traded units. The veil obscured deals Batista struck with a host of partners, notably Abu Dhabi’s Mubadala Development Co.’s investment in EBX holding. These practices blindsided minority investors as Batista’s edifice began to crumble.
3. Watch out for revolving-door executives. Batista replaced his top executives as often as he alternated between jets of his once-growing personal plane collection. OGX replaced its chief executive officer, chief financial officer and its oil exploration chief twice in 2012 alone. This past month, OGX fired its CFO again and hired a fifth debt-restructuring adviser. Short tenures make it hard for executives to deliver sound results, a symptom of bigger problems at the top.
4. Mind the gap between goals and reality. Batista never delivered on his grandest promises. LLX’s Manhattan-sized Acu Superport project on Brazil's southeast coast suffered years of delays before Batista sold it last month. OGX’s Tubarao Azul offshore field, where the company aimed to pump 20,000 barrels of oil a day, produced less than half that amount last year before OGX finally declared the wells non-viable in July. In May, Batista’s cash-strapped flagship company even bid for -- and later relinquished -- new fields it couldn't possibly develop. Some CEOs may like to daydream, but that’s a luxury prudent investors can’t afford. Which brings us to…
5. Value CEOs who are solid managers, not just good salesmen. Batista is great at selling -- dreams, that is. He turned his opulent lifestyle and his photo ops with Brazil’s President Dilma Rousseff into credibility he used as currency. But his management skills fell short. Batista earned a reputation as a micromanager who struggled to delegate decisions to his ever-changing staff. This may be tolerated in the face of successful results, but aggressive sales with poor execution soon hurt business.
6. CEOs with overgrown egos can cause outsized problems. Batista has an ego the size of an offshore oil rig. Last year he vowed to surpass Mexico’s Carlos Slim to become the world’s richest man. And he suggested that Brazil should erect a statue in his honor. Self-involvement can make leaders forget where their interests end and where their duty to others begins. When his son Thor ran over and killed a cyclist in Rio de Janeiro in March 2012, Batista blamed the cyclist on Twitter and had an EBX spokesman defend his son in public.
Batista’s value destroying touch has become more evident as he divests assets the market still deems of value. For example, LLX shares rose more than 50 percent after he announced the sale of the company. Batista may want more time and money to fund OGX’s remaining oil ventures, but he will be hard-pressed to get it. Following this series of debacles, sensible investors will probably steer clear of a man who over-promised and under-delivered.
(Raul Gallegos is the Latin American correspondent for the World View blog. Follow him on Twitter.)