Fitch Rates PDVSA’s Proposed US$4.5 Billion Issuance ‘B+/RR4’
CHICAGO – Fitch Ratings expects to rate Petroleos de Venezuela, S.A.’s (PDVSA) proposed senior unsecured debt issuance of up to US$4.5 billion at ‘B+/RR4’. The company plans to use the proceeds to refinance upcoming maturities and for general corporate purposes.
PDVSA’s credit quality reflects the company’s linkage to the government of Venezuela as a state-owned entity, combined with increased government control over business strategies and internal resources. This underscores the close link between the company’s credit profile and that of the sovereign. PDVSA’s ratings also consider the company’s strong balance sheet, sizeable proven hydrocarbon reserves, and strategic interests in international downstream assets.
Linkage to Sovereign
PDVSA’s credit quality is inextricably linked to the Venezuelan government. It is a state-owned entity whose royalties and tax payments have historically represented more than 50% of the government’s revenues. PDVSA is of strategic importance to the social policies of the country, as the government defined the company’s charter and mission statement to allow it to participate in industries that contribute to the country’s social development, including health care, education, and agriculture.
Stand-Alone Credit Profile Solid for Rating Category
PDVSA continues to be an important player in the global energy sector. The company’s competitive position is strong and supported by its reported sizeable proven hydrocarbon reserves, strategic interests in international downstream assets and private participation in upstream operations. The company also benefits from a strong balance sheet, which is in line with many of its competitors. These strong credit attributes are consistent with a higher rating category although sovereign related risks offset the strength of the financial profile and constrain the rating to that of the sovereign.
Cash Flow Affected By Transfers to Government
PDVSA’s cash flow generation is significantly affected by the large amount of funds transferred to the central government each year. During 2012, total transfers to central government and external parties amounted to more than US$60 billion, or approximately 48% of total reported revenues in the form of royalties, social development expenditures, oil bartering agreements, taxes and dividends. The high level of transfers to central government effectively renders PDVSA’s cash flow from operations (CFO) negative. The company partially offset the US$60 billion of cash outflow to the government in 2012 with US$40 billion of inflows labeled as taxes payable and other liabilities. This figure includes US$11 billion of additional Venezuelan treasury notes transferred to the company during 2012.
Moderate Leverage
PDVSA reported an EBITDA after royalties and social expenditure, which include most oil bartering agreements, of approximately US$20 billion and an FFO of US$26 billion during the last 12 months (LTM) ended June 30, 2013. Total financial debt as of June 30, 2013 increased to US$39 billion from US$35 billion as of year-end 2011. The company’s estimated leverage level of approximately 2.0x is low for the rating category, which is limited by credit quality of the Venezuelan government. Capital expenditures totaled approximately US$80 billion over the past four and a half years and might increase significantly if the company intensifies its exploration and production efforts on the Orinoco oil belt.
Limited Transparency
Venezuela’s government displays limited transparency in the administration and use of government-managed funds, and in fiscal operations. This poses challenges to accurately assess the stance of fiscal policy and the full financial strength of the sovereign. As a direct by-product of being a state-owned entity, PDVSA displays similar characteristics, which reinforces the linkage of its ratings to those of the sovereign. In 2012, the company reported a total crude production of approximately 3.0 million barrels per day (bbpd) while Energy Intelligence’s Petroleum Intelligence Weekly and British Petroleum’s (BP) Statistical Review of World Energy estimated production at around 2.5 million bbpd and 2.7 million bbpd, respectively.
Leverage to Remain Stable
Under Fitch’s base case, PDVSA’s leverage is projected to remain stable due to the government’s issuance of treasury notes that are given to the company to bolster its cash and equivalents position. This forecast is based upon oil prices of between US$90 per barrel and US$75. Fitch’s base case has capital expenditure levels below that of PDVSA, which is projecting capex to total US$236 billion through 2018. Fitch’s more conservative approach to capital expenditures is a result of PDVSA’s historical levels of investments, which have been around US$20 billion per year. Under Fitch’s stress case scenario, which is built upon conservative oil prices of USD65 to USD50 per barrel between 2014 and 2017, PDVSA’s leverage would deteriorate to about 5.0x.
Large Hydrocarbon Reserves
PDVSA’s reported hydrocarbon reserves continue to increase with proved hydrocarbon reserves of 332 billion barrels of oil equivalent (boe) (approximately 90% oil and 10% natural gas) and proved developed hydrocarbon reserves of 20 billion boe as of December 2012. This represents a 15-year proved developed reserve life, which is considered robust for the company’s rating level. All reserves are property of the Bolivarian Republic of Venezuela and not the company. These reserve levels are amongst the highest in the world and bodes well for PDVSA’s ability to maintain high output levels in the near- to medium-term.
Rating Sensitivities
Catalysts for an upgrade include an upgrade to Venezuela’s sovereign rating, real independence from the government and a sharp and extended commodity price upturn. Catalysts for a downgrade include a downgrade to Venezuela’s ratings, a substantial increase in leverage to finance capital expenditures or government spending and a sharp and extended commodity price downturn.
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