Archive for February 4th, 2005

PDVSA and the sale of CITGO

February 4, 2005

PDVSA, via words of President Hugo Chavez himself, has expressed its desire to sell PDVSA’s affiliate company in the USA CITGO. CITGO is a refining and distribution company. PDVSA has owned all of CITGO since 1989, after purchasing a stake in the company and other refineries in the US in 1986. CITGO was purchased as part of the country’s internationalization strategy of insuring the placement of the country’ oil production in both weak and strong markets. Basically, Venezuela’s oil contains too much sulfur, which in time of low demand implied the country could not find refining capacity for all of its crudes. This created to volatilities for selling the country’s oil: The price volatility and the volatility of not being able to place all of the country’ productions, particularly when prices were low.  By purchasing refineries and eventually all of CITGO, Venezuela acquired the capacity to process almost all of its production. Citgo was one part of the internationalization strategy, which was divided worldwide under PDVSA Holdings for the US and a Dutch company, Propernyn, for Europe and the rest of the world.


When Hugo Chávez became President, the whole internationalization strategy was severely questioned. The arguments included that the policy had not been productive for the country in dividends, that Venezuela had been subsidizing US consumers and that it was all invented as a way of stashing away PDVSA’s savings out of the reach of the Government. If the latter had been true, there would have been more straightforward ways of preserving savings, such as buying oil producing or distribution companies elsewhere such as YPF. Instead, PDVSA undertook a very carefully planned strategy of buying strategic properties to guarantee placing the country’s production. It is easy to say now that demand is strong that the strategy was not a good one, but there was a time when it was not trivial for the company to place all of its high sulfur oil production.


 


Despite the attacks on CITGO, talk of selling it died down, after each of the Presidents’ of PDVSA named by Chávez defended its presence within the company’s structure. There were rumors in early 2003 that the Government was looking for a buyer, which intensified even further when the company issued debt way ahead of the maturity of the 2003 PDVSA Finance issue, which matured in August 2003. It seemed suspicious to issue notes in February, arguing that part of the proceeds would be used to pay another issue maturing six months later.


The possible sale had been mostly forgotten until this week, when Hugo Chávez himself began   making charges which reflect either a lack of information on the subject by those that surround him or his desire to convince the people of the sale using political arguments. All of Chávez’ arguments, from the fact that few Venezuelans work at the company, or that CITGO subsidizes Bush or does not own any of the gas stations are all moot. They appear to be excuses to justify the sale politically. PDVSA has never claimed that it owns the CITGO gasoline station network, an investment that definitely could not be justified.


 


What is not clear is exactly why the Government wants to sell CITGO, other than for political reasons.   Does it want to raise the cash or does it want to get rid of a property that could become entangled in lawsuits in the US, but relating to issues here in Venezuela? The only thing that is clear is that the idea has been refloated by the new members of the new PDVSA Board named recently and that the previous Presidents of both PDVSA and CITGO opposed the sale.


 


Strategically, CITGO may not be as important any longer for Venezuela given the strong oil markets of today, but there is no guarantee that they will remain strong forever and it guarantees the placement of an important fraction of the country’s oil production. Economically, the argument that it is not a good business is hard to believe as the gasoline market is very competitive in the US and prices at the pump level vary very little. CITGO has been paying dividends to PDVSA and in 2003 the company had earnings of US$ 439 million. If there were an ideal buyer, it may also be justified, as PDVSA could sell CITGO and use the money elsewhere, but CITGO has its particular characteristics that make a perfect fir difficult.


The public announcement of the sale will certainly not facilitate executing the sale of CITGO.


 


Expressing the outright desire to sell it and arguing that it is not a good business publicly, does not appear to be the best negotiating strategy. Additionally, PDVSA holds long term contracts with CITGO that may make the sale quite complex. In the end, it will all be a matter of price. We suspect the Government has an overoptimistic estimate of how much it could fetch for CITGO. A good comparable to CITGO is Valero Energy (itself a company that may be interested) that trades publicly with a P/E of roughly 10, which will give CITGO a valuation of around US$ 5 billion, below the numbers that the Government has been suggesting in private, which range from US$ 7 billion to US$ 12 billion. We suspect these numbers are overoptimistic.


 


While mostly private companies are mentioned as possible buyers of CITGO, we also suspect that some oil producing countries may be more interested in it as a strategic investment, than private companies. That in itself may force the Government to rethink its strategy of selling the company. What is certainly not very responsible is to say the company is not a good investment, its business is not a good one and gasoline is sold at a discount. This instantly lowers the price you are trying to get for CITGO.


 


In the end, the sale of CITGO may simply be a way of having PDVSA get the funds to spend them in the next year and a half and guarantee Chavez’ election in late 2006. If true, it will be a true tragedy for Venezuela, as we will lose both a strategic property for our oil industry and a huge amount of money which will be used to satisfy the political needs of the revolution.

The best of the day…bizarre…unreal…unethical…whatever

February 4, 2005

Headline #1 “Prices can’t go up” 


Foodstuffs? Gasoline? Rent? Newspapers? Clothing?


 


No, this was said by the Minister of Housing referring to the prices of real state. But let’s hear his words in detail:


 


The Minister of Housing, Julio Montes, suggested to real state agents and owners that “please do not increase prices”, due to the demand that will be sparked by the new financing mechanisms. “We don’t want to apply compulsive measures, but in the case that prices surpass the limits of the markets (??), we can ask to have them assessed and have reference prices”


 


Get it? He is asking people not to ask for higher prices for their property, a very normal type of human behavior. He does not want to apply any measures, but he has come up with a novel mechanism of valuing property, which apparently has nothing to do with markets. But the winning phrase has to be:


 


“If prices surpass the limits of the markets”


 


I will let the readers know when I find someone that understands how prices can exceed the limits of markets, whatever that may mean.


 


Headline #2 President of Supreme Court defends decision to review “power vacuum” ruling


 


The new President of the new Supreme Court said that the decision by the Full Supreme Court that ruled that on April 2002 there was a power vacuum and not a coup is “reviewable”.


 


But let’s hear exactly what this impartial judge thinks about a case he may have to rule on in the future based on the law:


 


“I said we were facing a coup. I told the Justices to stay firm and not to resign, to defend the Constitution, because by resigning we would create a crisis. As I said, I had no problems in telling the media that we had a coup here and this has been recognized by international instances (Irish movies?).”


 


Now, this is also an interesting precedent, the Supreme Court reviewing a decision by the Supreme Court. Why rule at all, if he already made up his mind? Guilty until proven innocent!Good Jurisprudence as they would say at Oxford Law.


 


Headline #3: Judges that voided decision suspended


 


The Supreme Court suspended the Judges of the 10th. Court of Appeals that yesterday voided the decision to prohibit those charged with going to the Presidential Palace of leaving the country. Said the President of the Court, the same one that called for impartial Justice the day before:


 


”In this way we emphasize that we will never again allow that impunity be generated in the country, that the Judges that have sworn to fulfill the Constitution…overrun the Constitution generating absolute impunity.”


 


Interesting, I guess you could say: Impunity is in the eyes of the beholder.


 


But let’s hear what another member of the Supreme Court says about this decision:


 


“I am concerned that the judges are being punished for deciding, which is in the nature of their functions. They have to have freedom according to the law and justice. If a judge is threatened, it will not be able to decide in an independent fashion to guarantee the rights of the citizens”


 


I could not have said it better, except she uses subversive words, like deciding, freedom, law, justice and independence which are simply not part of the revolutionary justice. Will she be removed?


 


Headline #4 And they were charged


 


Seven bankers were charged yesterday for usury. The case refers to issuing indexed loans to consumers, more than one hundred bankers and owners of banks are on the list to be charged. Curiously, one of those charged yesterday is the President of a bank that never issued indexed loans. Another one was President of a Chilean Bank who went bank to Chile years ago and no longer even works for the same group. Let’s see 100 bankers, 400 people that went to the Palace in Aril 2002, they are running out of opposition leaders to charge. Are murderers next? Nah! They are not a priority. Politics above all!

The best of the day…bizarre…unreal…unethical…whatever

February 4, 2005

Headline #1 “Prices can’t go up” 


Foodstuffs? Gasoline? Rent? Newspapers? Clothing?


 


No, this was said by the Minister of Housing referring to the prices of real state. But let’s hear his words in detail:


 


The Minister of Housing, Julio Montes, suggested to real state agents and owners that “please do not increase prices”, due to the demand that will be sparked by the new financing mechanisms. “We don’t want to apply compulsive measures, but in the case that prices surpass the limits of the markets (??), we can ask to have them assessed and have reference prices”


 


Get it? He is asking people not to ask for higher prices for their property, a very normal type of human behavior. He does not want to apply any measures, but he has come up with a novel mechanism of valuing property, which apparently has nothing to do with markets. But the winning phrase has to be:


 


“If prices surpass the limits of the markets”


 


I will let the readers know when I find someone that understands how prices can exceed the limits of markets, whatever that may mean.


 


Headline #2 President of Supreme Court defends decision to review “power vacuum” ruling


 


The new President of the new Supreme Court said that the decision by the Full Supreme Court that ruled that on April 2002 there was a power vacuum and not a coup is “reviewable”.


 


But let’s hear exactly what this impartial judge thinks about a case he may have to rule on in the future based on the law:


 


“I said we were facing a coup. I told the Justices to stay firm and not to resign, to defend the Constitution, because by resigning we would create a crisis. As I said, I had no problems in telling the media that we had a coup here and this has been recognized by international instances (Irish movies?).”


 


Now, this is also an interesting precedent, the Supreme Court reviewing a decision by the Supreme Court. Why rule at all, if he already made up his mind? Guilty until proven innocent!Good Jurisprudence as they would say at Oxford Law.


 


Headline #3: Judges that voided decision suspended


 


The Supreme Court suspended the Judges of the 10th. Court of Appeals that yesterday voided the decision to prohibit those charged with going to the Presidential Palace of leaving the country. Said the President of the Court, the same one that called for impartial Justice the day before:


 


”In this way we emphasize that we will never again allow that impunity be generated in the country, that the Judges that have sworn to fulfill the Constitution…overrun the Constitution generating absolute impunity.”


 


Interesting, I guess you could say: Impunity is in the eyes of the beholder.


 


But let’s hear what another member of the Supreme Court says about this decision:


 


“I am concerned that the judges are being punished for deciding, which is in the nature of their functions. They have to have freedom according to the law and justice. If a judge is threatened, it will not be able to decide in an independent fashion to guarantee the rights of the citizens”


 


I could not have said it better, except she uses subversive words, like deciding, freedom, law, justice and independence which are simply not part of the revolutionary justice. Will she be removed?


 


Headline #4 And they were charged


 


Seven bankers were charged yesterday for usury. The case refers to issuing indexed loans to consumers, more than one hundred bankers and owners of banks are on the list to be charged. Curiously, one of those charged yesterday is the President of a bank that never issued indexed loans. Another one was President of a Chilean Bank who went bank to Chile years ago and no longer even works for the same group. Let’s see 100 bankers, 400 people that went to the Palace in Aril 2002, they are running out of opposition leaders to charge. Are murderers next? Nah! They are not a priority. Politics above all!

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