Archive for March 5th, 2005

A simple idea: The Government should take Citgo public

March 5, 2005

This is
something I thought about a few days ago briefly, but it was not until a
conversation I had today with my brother that I realized what a good idea it
may be. The Venezuela Government wants to sell CITGO (see
article in today’s NYT
) because it does not believe that the return on its investment
is good enough and the funds would be better spent in Venezuela.
Well, I think my proposal is much better: Let’s have the best of both worlds,
let’s take a large part of CITGO public, while the Venezuelan Government
retains control of it. In this manner, PDVSA or the Government, whichever way
you want to see it, will recover its original investment plus gains during these
years, but it will retain the strategic importance of CITGO in the country’s overall
oil strategy.

But first
some background for the uninitiated. (Some more here).
In the earlier 80’s there was an oversupply of crude in the world and given
that Venezuela’s
crudes are sulfur rich, it was becoming more difficult to place the country’s crude.
PDVSA first acquired control of CITGO and later it bought the rest of the
company, as well as a couple of refineries to support the policy. When Chavez
was running for President he charged that PDVSA was not getting its money’s
worth and promised he would sell the company after he was elected. Despite
this, all of the Chavez’ nominated President’s of both CITGO and PDVSA in the
last six years, found the CITGO ownership of PDVSA to be a positive and talk of
its sale had died down.


But with
the new changes in PDVSA and the ascent of Bernard Mommer to the company’s
Board, the idea of selling CITGO has resurfaced. Chavez in his characteristic
manner, has been saying that he now learns the gas stations don’t belong to
CITGO (which was known by everyone), that Venezuela is subsidizing the US and
that the money would be better used here. Except the last one, the rest are
simply not true.

While it
is true that under current strong oil prices the internationalization strategy
is no longer as critical as it was one day, it may be shortsighted to sell
CITGO now, only to see prices collapse once again. (I know, everyone is
predicting oil prices can’t go down, this time is different, I have heard all
that before, the NASDAQ could not go down and oil could not go down in 1980 or
up in 1998, but all three of these instances proved to be the same as the past,
nothing goes up forever and it is never really that different)

From an economic
point of view, I can’t really conclude whether owning CITGO has been good or
not, from an strategic point of view it guaranteed Venezuela markets for quite
a while, that otherwise may not have been available.

Thus, my
suggestion is: If the Chavez administration really believes that it is not a
good business, it can simply take the company public by selling let’s say
60-65% of the stock in an IPO in the NYSE (It could accompany it with a local
listing too). This will allow PDVSA to retain operating control of CITGO, while
the Government will be able to recoup most of the value of the company.
Moreover, by doing an IPO, the Government will realize a price higher than what
it would get in a sale, since by now, every oil company knows that Chavez wants
to sell it and will try to underpay for it. In fact, oil stocks are right now
at their historical maximum (Exxon passed General
Electric this week as the most valuable company in the world
).

CITGO
would still be run by a Board with a majority representation from PDVSA, but it
will have to add external Directors. Additionally, the company will have to
clearly show that its plan for the future is to maximize shareholder value,
either by distributing dividends or expanding business. If CITGO ceases to be strategically
important, Venezuela
could even sell its stock in the market slowly over time. The company would
also have to be run with a great deal of transparency, once it becomes a public.

On the
negative side, some have suggested the Government really wants to sell CITGO as
a way of removing all valuable assets from the US,
just in case Venezuela
ever decided not to pay its external debt. This would imply this idea is of no
interest to the Chavez administration. The sale will also require that the
Chavez Government sound market friendly for a while in order to maximize the
value of the stock at the time of the IPO.

Finally, I
know that I am dreaming thinking that this may even be possible. The solution
is simply too “market oriented” for the current administration, which just
declared itself “socialist” last Saturady. But it clearly makes too much sense and
represents a win-win situation in which the country would receive a substantial
part of its investment and maximize the price of this return, while at the same
time retaining control over the strategy and future of CITGO, which may become
very important again for Venezuela
in the near future.

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