Yesterday morning I was surprised to see Jose Suarez Nuñez, one of the most connected and knowledgable oil reporters in Venezuela, saying that the country would sell Citgo because it didn’t have enough oil to supply both Citgo and its new commitments to China. Venezuela has had Citgo up for sale for years, but there have been a few problems:
1. It’s awful useful for Venezuela to keep it.
2. Nobody wants to buy it — at least not at the prices that Venezuela wants.
But then tonight the president of the republic said, according to El Universal (my translation):
This continues, and I have to be fighting so they give us dividends. Rafael (Ramírez), remember what I told you…Eight refineries in the U.S., Bilbao, and they don’t give dividends. And that company finances even hospitals there… Now this is an agreement we received from the Fourth Republic. It even sold oil at a discount to the U.S., as low as $3 a barrel. We freed ourself from that…The Citgo, that sure should cost much more, of course. Citgo should cost much more than $10 billion Alí (Rodríguez Araque). Only if we sell it and put the money in the banks, how much would it give us there, in pure interest? …Now that company has eight refineries, I don’t know how many thousands of distribution tanks, terminals, pipelines. And it distributes fuel, made with Venezuelan crude, to 8,000 service stations in the U.S. and doesn’t give us profit.
It’s a strange message, really. If it’s not a profitable business, why would someone spend more than $10 billion on it?
So is it profitable?
According to a Citgo bond document from earlier this year, Citgo didn’t pay a dividend in 2009. This isn’t that weird — it was the worst year in ages for U.S. refiners, and everybody lost money. And that same bond has a restrictive covenant forbidding any dividend this year. In 2008, Citgo paid $1.3 billion in dividends. In 2007, another $1.3 billion in dividends. So over 4 years, $2.6 billion in dividends, or an average of $650 million a year.
There’s also a bunch of tough-to-account-for little benefits to having Citgo around. In dry accounting language, the bond document says
“From time to time we provide services for and make payments on behalf of PDVSA for various items such as medical expenses, travel and accommodations, advertising and transportation. We have in the past and may in the future declare and pay indirect non-cash dividends in order to settle such payments. In 2009, we declared indirect non-cash dividends in the amount of $100 million, consisting of $28 million to settle such payments and $72 million to settle the transfer of certain non-operating assets to PDVSA. In 2008, we declared indirect non-cash dividends of $105 million to settle the transfer of non-operating assets to PDVSA. As of March 31, 2010, PDVSA and its other subsidiaries and affiliates (other than our consolidated subsidiaries and direct affiliates) owed us an aggregate of approximately $6.5 million in respect of such services.
What this means in the real world is that Citgo buys all sorts of stuff in the U.S. and gives it to PDVSA or the national government. The biggest examples are planes. I haven’t been able to confirm all of these, but it looks to me like Citgo bought and then transfered to PDVSA or Conviasa a series of Falcon, Lear and Bombardier jets in recent years. I can’t vouch for all these databases I’m about to use, so my apologies to all if this info isn’t quite right. But from what I have been able to piece together, there are many examples. One was in February of last year, when Citgo apparently registered two newly delivered Bombardier Continental 601 jets in the U.S. as N627CP and N628CP. Those planes were then immediately re-registered in Venezuela as YV1111 and YV1115. But this doesn’t look like a Citgo jet.
Now, I don’t know how all the back-end accounting works on this stuff, but it’s clear that Citgo’s utility to Venezuela goes beyond “profitability.”
There are also costs associated with Citgo. Being in the U.S., it’s subject to seizure in the case of a lawsuit going against Venezuela. It is currently subject to some EPA sanctions for pollution. And the U.S. keeps tightening the screws on refineries, especially in environmental matters, so costs are likely to keep coming.
So is it worth it for Venezuela to sell Citgo?
Let’s say the off-the-books benefits and costs wipe one another out, more or less. That leaves the big benefit – the dividends of, on recent average, $650 million a year. Venezuela has huge capital expenditure needs at home, whether it’s fixing up the Puerto la Cruz refinery or building the new Orinoco Belt oil production projects. A total of about $250 billion. That money has to come from somewhere. If Venezuela borrows to get the cash, it has to pay more than 10% interest. So, without getting too much into time value of money and inflation expectations, if PDVSA could get anything above $6.5 billion for Citgo, it would be quite worthwhile to cash out and invest the money in Venezuela, rather than borrowing.
The problem, then, is that nobody is buying North American refineries…