26 March 2007
Fitch Ratings has assigneda 'BB-' rating to Petroleos de Venezuela S.A.'s (PDVSA) proposed senior note issuance of up to US$5 billion. The RatingOutlook is Stable. Proceeds from issuance are expected to beused to fund capital expenditures and for other generalcorporate purposes.
PDVSA's foreign and local currency Issuer Default Ratings are constrained by Fitch's 'BB-' foreign currency rating of the Bolivarian Republic of Venezuela and are strongly linked witht he sovereign's credit profile. The linkage is based on the company's governance as a state-owned entity, the shareholder's ultimate ability to influence PDVSA's financial flexibility, and utilization of PDVSA's financial resources forquasi-sovereign and fiscal, rather than productive capacity, uses. Currently, the oil minister and the PDVSA president are one and the same, further demonstrating the government's tight control over the strategy and resources of PDVSA. Fitch remains concerned about sovereign credit trends in Venezuela, underscored by recent nationalizations and aggressive stance toward the private sector, as well as by measures from lower oil prices, buoyant government spending and a heterodox macropolicy framework. The additional debt incurred by PDVSA will raise gross public and public external debt ratios; hence,F itch will monitor the use of proceeds and whether the proceeds are invested productively or used to support current government spending.
The company's credit metrics are strong for the rating category, characterized by low leverage and high interest expense coverage; however, they are tempered by substantial redirection of financial resources to government spending.
Credit metrics are expected to be strong at fiscal year end2006, with interest coverage, as measured by EBITDA to interest expense, of over 100 times (x) and financial leverage, as measured by total debt-to-EBITDA, of 0.1x. Over the next few years these measures are expected to remain quite strong despite a large capital spending program, payouts for social programs and other transfers to the government. At the end of fiscal 2006, the company transferred approximately $38.2billion to the Venezuelan government in the form of income tax payments, royalties, dividends and contributions to social spending. A robust year in the 2006 crude market resulted in a38% increase in total contributions to the government from $24.6 billion in 2005. Transfers from PDVSA to the government, excluding social spending, accounted for approximately 51% and 59% of the government revenue during 2005 and 2004, respectively.
According to PDVSA, total 2006 crude oil production, including the company's equity production from all joint ventures and partnerships, was approximately 2.9 million barrels per day(b/d). In 2005, PDVSA reported crude oil production of approximately 2.9 million b/d, still short of the 3.1 millionb/d attained in 2001, demonstrating the impact of the strike in 2002-2003. As of February 2007, a production cut of 195,000 b/d became effective in accordance with the OPEC decision to reduce production levels.
The Venezuelan Heavy Oil Strategic Associations, in which PDVSA subsidiaries currently hold interests ranging between 30% and 49.9%, contribute about 0.5 million b/d to national oil production. The Venezuelan government recently passed a decree whereby PDVSA must hold upwards of 60% ownership in each of the Heavy Oil projects. Details of the change in ownership are still unknown. The national production mix has been changing over the past 10 years and now PDVSA's own production represents a smaller portion, but still significant component of total output than it did a decade ago.
PDVSA capital expenditure program is large. The company announced that it would increase national oil production to 5.8million b/d and refining capacity to about 4.1 million b/d by 2012 as part of its US$77.4 billion investment program, of which US$20 billion is expected to be invested by thirdparties. These initiatives continue to be central to the company's long term strategy; however, near-term appetite from potential sponsors and/or investors for Venezuelan risk is uncertain in the current policy environment. In 2004 and 2005, the Venezuelan government modified both the royalty rate and the income tax rate applicable to the Venezuelan Heavy Oil Strategic Associations. More importantly, the Heavy Oil Strategic Associations are now being converted to joint ventures with PDVSA assuming 51% to 60% ownership by approximately May 2007, in accordance with the 1999 constitution of the Bolivarian Republic of Venezuela.
PDVSA is in the process of certifying oil reserves located in the Orinoco Belt amounting to approximately 236 billion barrels. Should these reserves be certified, Venezuela will become the nation with the world's largest liquid hydrocarbon reserves. Given the many claims on PDVSA cash and the company's modest use of leverage, it is likely that PDVSA may seek to raise additional debt to finance this investment program.
PDVSA, Venezuela's national oil company, is engaged in the exploration and production of crude oil and natural gas; there fining, marketing and transportation of crude and refined products; and the production of petrochemicals, as well asv arious other hydrocarbon-related activities in Venezuela and abroad. The Venezuelan government is the company's sole shareholder.