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February 12, 2008 |
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PETROLEOS DE VENEZUELA: Freeze Order No Rating Impact, S&P Says Standard & Poor's Ratings Services disclosed that news regarding Exxon Mobil Corp.'s (Exxon Mobil; AAA/Stable/A-1+) moves to freeze US$12 billion in Venezuelan state-run oil firm, Petroleos de Venezuela S.A.'s (PDVSA; BB-/Stable/--) overseas assets has no immediate impact on S&P's rating and outlook on the Bolivarian Republic Venezuela (Venezuela; BB-/Stable/B) and its national oil company and related entities, including CITGO Petroleum Corp. (CITGO; BB/Stable/--), Petrozuata Finance Inc. and C.A. La Electricidad De Caracas (BB-/Stable/--). The reach of the court orders obtained by Exxon Mobil in the U.K., the Netherlands, and the Netherlands Antilles outside of the aforementioned jurisdictions is uncertain. Furthermore, frozen assets in the U.S. are limited to about US$300 million, which is not significant relative to Petroleos de Venezuela's unrestricted cash in hand (about US$3.6 billion as of second-quarter 2007) and total assets (about US$92 billion as of second-quarter 2007). S&P does not believe the aforementioned court orders will have a meaningful impact on the oil firm's day-to-day operations, given that it appears that the court order only prevents it from disposing of its assets. Nevertheless, credit terms from suppliers and financial institutions could become more stringent and increase the cash cost of doing business for the issuer. Furthermore, the rulings highlight S&P's ongoing concern regarding the issuer's ability to attract foreign investment in light of the government's decision to restructure Petroleos de Venezuela's operating service agreements and to grant the oil firm a majority share in the heavy oil production and upgrading projects in the Orinoco Zuata region. S&P views a retaliatory interruption in crude supply, threatened by President Chavez, as unlikely given that sales in the U.S. represent about half of the firm's revenues. S&P will continue to monitor the situation closely to asses further the potential rating impact of the dispute between Petroleos de Venezuela and Exxon Mobil. The ratings on the oil-firm and its sole shareholder, Venezuela, are tightly linked, reflecting S&P's opinion that Petroleos de Venezuela is a public policy-based institution that plays a central role in meeting the sovereign's political and economic objectives. The ties of ownership and economic interests between the oil firm and Venezuela are evident in the significant contribution of the oil industry to government revenues (nearly 50%) and the country's exports (90%). The most important supporting rating factor for the sovereign is its solid balance sheet. Gross general government debt is expected to fall to 20% of GDP in 2008 and debt in net terms is expected to fall less than 5% of GDP, given the significant liquid assets the government has built up in various funds, most importantly in the FONDEN. Political factors continue to be the main constraint on the sovereign ratings. Expansionary public spending ahead of local and regional elections could undermine government finances and continue to fuel inflation, which is now more than 20%. Furthermore, changing and arbitrary laws, price and exchange controls, and other distorting economic measures have negatively affected Venezuela's domestic economy and have deterred foreign direct investment. The ratings and outlook on Petroleos de Venezuela's U.S. refining subsidiary CITGO Petroleum Corp. (BB/Stable/--) are unchanged following the legal action against its parent. While CITGO may face tighter credit terms from suppliers, its assets and operations do not appear to be affected by the freeze. Currently, the ratings on the Venezuelan oil firm limit those on CITGO, even though the refiner's credit profile is commensurate with a higher rating level. The court actions do not change the CreditWatch Positive placement of S&P's 'B' rating on Petrozuata Finance Inc.'s US$287.2 million bonds due 2009, US$625 million bonds due 2017, and US$75 million bonds due 2022. Petrozuata is a heavy oil production and upgrading project that is wholly owned by Petroleos de Venezuela. However, any developments that could restrict access to Petrozuata's trustee-held funds in New York could lead to a change in the CreditWatch listing and possibly a change in the Petrozuata bond ratings. The CreditWatch Positive placement reflects the reduced potential of a project default due to resolved government tax payments, Petroleos de Venezuela's demonstrated interest in preventing a default at Petrozuata and other heavy oil projects, and continuing good operations. The oil firm tendered the project bonds of the Cerro Negro project in December 2007 and could do the same for Petrozuata to prevent lenders from accelerating the debt that might occur due to the change on control when ConocoPhillips left the joint venture. Since such a payout would probably be funded from the Petrozuata trustee-held funds. Any restrictions on the funds could make it more challenging for the Venezuelan oil firm to tender the Petrozuata bonds. The ratings on C.A. La Electricidad De Caracas and Petroleos de Venezuela, its majority shareholder, are tightly linked. S&P believes that La Electricidad De Caracas is also a public policy- based institution that plays a central role in meeting the government's political and economic objectives, given de facto franchise to distribute electricity in the Caracas metropolitan area, which is the largest city in Venezuela, and is the nation's capital. Petroleos de Venezuela SA -- http://www.pdv.com/ -- is Venezuela's state oil company in charge of the development of the petroleum, petrochemical and coal industry, as well as planning, coordinating, supervising and controlling the operational activities of its divisions, both in Venezuela and abroad. The company has a commercial office in China. |
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