OGX Makes Headway in 1Q

OGX reported results for the first quarter ended March 31, 2010. The following financial and operating information is presented on a consolidated basis, pursuant to Brazilian corporate law, in thousands of reais (R$), unless stated otherwise.

"During the first quarter of 2010, OGX continued to make great advances in its drilling campaign, seeing significant progress in the identification of new accumulations as well as in the delineation of prior discoveries. Since the beginning of the year, OGX initiated drilling activities in eight wells, two of them in the Santos Basin, and is now poised to initiate the drilling of its first onshore well in the Parnaiba Basin, which is expected to occur in the month of May. Since the beginning of our drilling campaign in September 2009, thirteen wells have been initiated, ten of which have resulted in discoveries and three of which are in initial stages of drilling," commented Mr. Paulo Mendonça, OGX General Executive Officer.

"In the coming months, we anticipate undertaking a series of Drillstem Tests, an important step toward the goal of initiating production in 2011. Production is currently expected to commence in the Vesuvio and Waimea prospects," added Mr. Mendonça.

First Quarter Highlights and Subsequent Events:

  • Commencement of drilling activities for six wells in the Campos Basin in the first months of 2011: OGX-6, OGX-7, OGX-8, OGX-9DB, OGX-10 and OGX-13;
  • Initiation of the drilling campaign in the Santos Basin with drilling activities at OGX-11D and OGX-12 wells in BM-S-59 and BM-S-57 blocks respectively;
  • Chartered the onshore drilling unit, QG-1, from Queiroz Galvão, for the drilling of the first well in the Parnaíba Basin, expected to begin in May 2010;
  • Chartered a sixth semi-submersible rig, Pride Venezuela, from Pride International;
  • OGXP3 was included in the Ibovespa index and subsequently its weighting within the index portfolio was increased. Since May 2010, OGXP3 has been given a weighting of 2.48%, corresponding to the 11th position in the selected portfolio of 66 stocks;
  • Gained approval from the ANP, the Brazilian Petroleum, Natural Gas and Biofuels Agency, for the transfer of the rights and obligations related to a 70% interest in seven exploratory onshore blocks in the Parnaíba Basin to OGX Maranhão Petróleo e Gás Ltda. (“OGX Maranhão”), a special purpose vehicle in which the Company holds a 66.7% stake and MPX Energia S.A. ("MPX") has 33.3% of the share capital.
  • Signed a Strategic Cooperation Agreement with OSX Brasil S.A. that supports OGX’s long-term demand for equipment and production services. The equipment provided by OSX will contribute to OGX’s compliance with local content requirement obligations assumed under concession contracts with the ANP.
  • Chartered the first FPSO (Floating Production Storage & Offloading) production vessel, OSX-1, from OSX Brasil S.A. for a period of 20 years;

Exploratory Campaign

During the first months of 2010, OGX has made important advances in its exploratory campaign by beginning drilling activities in six wells in the Campos Basin (OGX-6, OGX-7A, OGX-8, OGX-9, OGX-10 and OGX-13), three of which (OGX-6, OGX-7A, and OGX-8) were concluded with extremely important results. OGX also concluded drilling at OGX-4, OGX-5 and 1-MRK-2B-SPS, wells initiated during 2009, which also yielded very relevant information.

The wells drilled to date have confirmed the great oil-bearing potential of our blocks in the southern part of the Campos Basin, highlighted by the discovery of important accumulations in the Eocene, Maastrichtian, Santonian, Albian, Aptian and Barremian layers. Based on the data obtained from the drilling of seven wells in the Campos Basin (OGX-1 to OGX-6 and OGX-8), we estimate a total volume of recoverable oil of between 2.6 to 5.5 billion barrels.

Drilling activities at both OGX-6 and OGX-8 wells have allowed a better understanding of the geological parameters of the BM-C-41 block, where reached reservoirs show characteristics similar to the ones already identified in OGX-2A and OGX-3 wells. Our analysis of the data obtained to date indicates that the Albian and Aptian reservoirs of the Pipeline and Etna prospects (OGX-2 and OGX-6) are a connected, single accumulation for each geological layer. Regarding the potential connection between the Waimea and Fuji prospects (OGX-3 and OGX-8), new data and additional analysis will be required in order to verify whether we have encountered a single accumulation.

OGX has also initiated drilling activities for two appraisal wells at the Vesúvio accumulation, 3-OGX-9DB-RJS and 3-OGX13-RJS. The OGX-9DB well is in the final stage of drilling and, in addition to confirming the presence of sands previously identified in the OGX-1 well (Vesúvio prospect), has also detected new sand bodies, which indicates the existence of additional accumulations. The oil-water contact, a relevant indicator in the delineation process of the Vesuvio complex, was identified at deeper levels, and a Drillstem Test will be performed in the next weeks. OGX-13 is in an initial drilling stage and situated 4.25km from OGX-1 and 2.15km from OGX-9DB.

The commencement of drilling activities in the blocks wholly-owned by OGX in the Santos Basin marked the beginning of another very important cycle for the Company. The drilling of well OGX-11, Natal prospect, was initiated on April 9, 2010 in block BM-S-59, while the drilling of well OGX-12, Niterói prospect, began on April 29 in block BM-S-57. Drilling activities at each prospect are expected to be concluded in a period of approximately 90 days.

Ongoing Drilling Activities:

  • 3-OGX-9DB-RJS: Vesúvio prospect, a directional appraisal well is being drilled by the rig Ocean Ambassador in the BM-C-41 block, Campos Basin;
  • 1-OGX-10-RJS: Hawaii prospect, being drilled by the rig Sea Explorer in the BM-C-42 block, Campos Basin;
  • 1-OGX-11D-SPS: Natal prospect, being drilled by the rig Ocean Quest in the BM-S-59 block, Santos Basin;
  • 1-OGX-12-SPS: Niterói prospect, being drilled by the rig Ocean Star in the BM-S-57 block, Santos Basin;
  • 3-OGX-13-RJS: Vesúvio prospect, the second appraisal well in the prospect is being drilled by the rig Ocean Lexington in the BM-C-41 block, Campos Basin.

Based on the promising results from previously drilled wells, we contracted for a sixth semi-submersible drilling rig, Pride Venezuela, provided by Pride International. The rig will be available to OGX in the third quarter of 2010 for a period of up to one year and will enable the advancement of our delineation program. At the same time, the rig will allow OGX to continue identifying new exploratory prospects in the Campos and Santos Basins.

In May, OGX expects to initiate its drilling campaign in the Parnaíba Basin, in the State of Maranhão, with a well in the BT-PN-08 block. In preparation for the campaign, an onshore rig, QG-1, was hired from Queiroz Galvão. All of the logistical requirements have been met and the necessary equipment has been procured in order to drill this well, which is expected to take approximately 60 days.

In the coming months, we expect to conclude the drilling activities currently underway at wells OGX-9DB, OGX-10, OGX-11D, OGX-12 and OGX-13 in the Campos and Santos Basins, as well as commence the drilling of an appraisal well in the Waimea prospect. In addition, we expect to undertake a series of Drillstem Tests in wells OGX-7, OGX-9DB and OGX-10, which constitutes an important step in the delineation of our discoveries.

Additionally, in order to expand our portfolio with high potential assets, we are preparing to participate in the Open Round Colombia 2010 for concessions in exploratory blocks offered by the Colombian government, which is expected to occur toward the end of June. OGX believes that Colombia has interesting exploratory potential and that some members of our exploratory team have prior experience which could positively impact OGX's activities in this country.

Financial Performance

"OGX continues to manage its cash in a prudent manner. Even with the intensification of our drilling campaign, OGX has maintained a solid cash position of R$6.7 billion, equivalent to US $3.8 billion as of March 31, 2010. We recorded a net profit for the period of $76.3 million, derived primarily from the management of our financial resources, which generated a gross return of approximately 107% of Interbank Deposit Rate (CDI) and contributed net financial income of R$149.8 million. During the quarter, we increased our foreign exchange hedge position to US$1.1 billion, representing 11 months of financial commitments," commented Marcelo Torres, OGX Chief Execute Officer.

Net Financial Results

The net financial income of R$149.8 million in the period was impacted by three factors: interest income of R$148.8 million, the impact of marking-to-market the fair value results of the financial instruments of R$281.3 million and net losses on hedging of future commitments in foreign currency (U.S. dollars) of R$282.6 million and others of 2.3 million.

Exploratory Expenses

The reduction in exploratory expenses is primarily due to the decrease of seismic activities in the Campos, Espírito Santo and Santos Basins. Also impacting this account is rent paid to ANP for our exploration blocks, the guaranteed commission for the Minimum Exploration Program, and to a lesser extent, expenses related to technical, environmental and information technology consulting services.

Net Profit

Net profit for the period was R$76.3 million resulting from net financial income of R$149.8 million offset by Exploratory Expenses of R$23.4 million, General and Administrative Expenses of R$45.1 million and Income Tax and Social Contribution of R$5 million. The primary reason for the lower net profit in the first quarter of 2010 was the increase in financial expenses from R$71.9 million in the same period of 2009 to R$285.8 million.