Revisiting: Will and should Venezuela sell Citgo?

Argus is reporting that PDVSA is entertaining offers of $10 billion to $15 billion for Citgo Petroleum Corp. and is marketing its stake in the Chalmette refinery in Louisiana:

Venezuelan state-owned PdV has retained Deutsche Bank to find a buyer for its 50pc stake in the 184,000 b/d Chalmette refinery in Louisiana, a US-based PdV official told Argus… The energy ministry in Caracas confirmed today that Deutsche Bank is leading the search to find a buyer for PdV’s interest in the Chalmette refinery “as soon as possible.” …

Venezuelan officials told Argus yesterday that PdV is weighing offers in the range of $10bn-$15bn to buy its downstream subsidiary Citgo. The planned sale of Citgo is aimed at raising cash for upstream projects at home, redirecting more crude supply to China in exchange for oil-backed loans, and reducing the government´s potential exposure to international litigation.…

I don’t know if this will all be feasible from a legal standpoint, as the sale of assets that are subject to attachment in an arbitration claim could be frozen by the courts so that a potential winner can grab the assets. But assuming there’s a way to sell this stuff, does it make financial sense for PDVSA to do it?

Four years ago, I argued that it would make sense so long as Venezuela is able to get more than about $6 billion for the asset:

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…

Not much about the first paragraph has changed — so long as the country can get about 10x its dividend, it’s worthwhile to sell.

And then there’s the second paragraph. I don’t know how the dividend is doing these days, but in general, US refining has gotten very profitable again, thanks in part to fracking. Check out the market value of Valero, the biggest independent refiner in the US: the share price has more than tripled since 2010, from 15 to above 50. Sounds like people are buying North American refineries.

There is the issue that Citgo is partially mortgaged, but we’re talking about a pretty small piece of the overall take. $1.5 billion of debt can be rolled into a sale without any big problem.

So  while anti-Chavistas will likely howl about the loss of crown jewels and such, the sale of Citgo probably makes sense from a business point of view.

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10 thoughts on “Revisiting: Will and should Venezuela sell Citgo?

  1. Alexander Guerrero

    6500 billions USD will not be enough nor to cover a small hollow of contingent government debt created by CADIVI’s foreign exchange contracts breach. All CADIVI contingent debt is about 23,000 Billions USD!!. You would need 5 CITGO compounds!.

  2. Kepler

    This doesn’t make sense unless we had to get to this stage where the regime is broke because its members are criminals and fools. Had they not been so, we wouldn’t have had such needs or they would have been covered by other means.

  3. Alexander Guerrero

    After reading Argus new, my first reaction was that was not the way to report about selling/buying CITGO. For instance, I would find it normally if I read it this way. “PDVSA is looking for buyers in order to sell its CITGO refineries compound. It is not the same to buy or to purchase, lots of differences, say price, for example.

  4. Marianna Parraga

    I disagree with you. Even though your numbers analysis is correct, there is one more issue to be addressed here: at this point, Citgo is almost the only PDVSA’s client paying by cash. If PDVSA sells all Citgo refineries with supply contracts, as happened several years ago when it sold the asphalt refineries and the partnership Lyondell-Citgo, it would only guarantee a cashflow coming in from exports for a 5-10 year period, but after the first contract, all buyers have broken the contracts because they have been able to find better suppliers, mostly Canadian suppliers offering lower prices for heavy/extraheavy crudes similar to Venezuelan ones. So, even if PDVSA sells Citgo at a good price, it will receive cash to be burnt in its regular expenses, but it would not be compensated in the mid/long terms by incoming cashflow amidst numerous agreements involving barter and credit payments with oil.

    1. Alexander Guerrero

      That does not explain why CITGO today “only” purchases 384.000 b/d in PDVSA Caracas from more than one million two years ago. Some believe, wrongly, that PDVSA does that since it needs more oil to replete the Chinese Fund, where Chinese require more oil every six months. The reason being that CITGO is buying from Canada and Mexico cheaper oil than the one from his Pdvsa’s. But it looks that something more microeconomic is going on in CITGO, from the last two quarters you can observe a large decrease in profits. It looks that CITGO has contagion from the PDVSA Caracas’s syndrome; disinvestment and decapitalization. Selling oil refineries looks to be a little different, than selling mangos, particularly after reading the small print on the purchasing contracts when PDVSA bought them. I would think, that selling CITGO will continue by peace, one by one.
      Government will continue some other years without any international liquidity, other than is left over by PDVSA. Fifteen (15) years ago, 10% of GDP in oil revenues could pay 5-6% budget deficit, government expenditure was only 23% of GDP and the price of oil was 18$/barrel. Today you need three times that figure, however, the number continue to be the same (10% of GDP) and at 100$ for barrel!! And producing 1 million less barrel a day that 15 years ago. You can look the huge fiscal hollow caused by the government economic growth, oil revenues cannot pay that obesity, and it need a gastroplasty.
      On the other hand, the amount of debt (consolidated, banks and documented), expenses, debentures with associated partners, suppliers, services, etc. takes nearly 90% of oil rent, the remainder dollars might go to foreign exchange market to satisfy governments clients, will be there for some time. The “PDVSA ahora es de todos” model has collapsed, taking with her the large Venezuelan oil cycle, started in 1975 when the oil industry was nationalized and the oils concessions reversed. The time is coming for a huge privatization, similar the one happened in Russia when 1990 when the colossal fiscal collapse sent that country to a large financial crises. We are in the middle if that trip.

  5. marzolian

    The other problem: since when does PDVSA or Venezuela make decisions based strictly on economics?

    1. Caracas Canadian

      It would be wonderful to think that if they could obtain say $ 12 billion free and clear from a sale of CITGO that every penny of that would be invested in developing future production from the heavy Orinoco fields and redeveloping existing fields…….but that would be exceedingly naïve and even to imagine that one penny would be spent on investing in future production versus financing the short term day-by-day extension of the robolution is laughable.

      1. Alexander Guerrero

        You are right, even though I do not think someone would like to buy lot of refineries in one go, refining oil is the lees profitable section of whole oil industry (in average between 10% before EBIDTA), government financial needs are in all, short term, the marginal costs of politics has increased considerable from the Chavez’s dead, so they will do what they were doing in the last two years: raspando la olla.

  6. Alexander Guerrero

    Your are right, Ramirez said and declared few months ago this ” Who says that PDVSA should be profitable?” No more words, he said in seven words 15 years of oil history, le largest accordingly with oil prices.

    1. Alexander Guerrero

      You are right, even though I do not think someone would like to buy lot of refineries in one go, refining oil is the lees profitable section of whole oil industry (in average between 10% before EBIDTA), government financial needs are in all, short term, the marginal costs of politics has increased considerable from the Chavez’s dead, so they will do what they were doing in the last two years: raspando la olla.

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