* Chavez slams company, calls it a “bad business”
* Legal issues and poor market make sale unlikely
* PDVSA sold stake in German refineries this month
By Daniel Wallis
CARACAS, Oct 28 (Reuters) - The sale by Venezuela’s PDVSA of its biggest European refining assets shines a spotlight on its troubled U.S. subsidiary Citgo, but the state oil company is unlikely to be able to offload the refiner any time soon.
South America’s top crude exporter has almost 750,000 barrels per day (bpd) of refining capacity at three Citgo facilities including Louisiana’s Lake Charles Refinery, the fifth largest in the United States.
But Citgo has drawn increasing fire from President Hugo Chavez, who says it is a bad business that makes no profit for Venezuelans — prompting speculation that it will be next after PDVSA sold its stake in the four Ruhr Oel refineries in Germany this month. [ID:nN14122078]
Some analysts say that is unlikely, given the weakness of the U.S. economy and a big dip in Gulf Coast refining margins.
“We don’t see the sale of Citgo happening in the short term,” the economic think tank Global Source Partners said in a report this week. “To realize this dream before a change in tide would probably mean leaving too much money on the table.”
There are several reasons why Chavez may want to sell Citgo.
First, a bond offer this year highlighted the U.S. refiner’s financial woes. It made a $201 million loss last year then a $128 million loss in the first quarter of this year, down from a profit of $801 million in 2008. [ID:nN25135185]
The company conceded that its “substantial indebtedness” could impair its ability to pay obligations under the notes.
Second, its sale would fit the socialist leader’s political world view. Chavez often bashes Citgo, calling it a “perfect deal for the gringos” at a time when he wants to boost exports to countries such as China and Belarus at the expense of PDVSA’s traditional customer, the United States. [ID:nN27282110]
The former soldier is a leading critic of U.S. foreign policy and says PDVSA has been subsidizing Washington’s “Yankee empire”. He has called on Citgo, which buys about a quarter of the Venezuelan crude shipped to the United States, to pay bigger dividends to his government and hire more Venezuelans.
(For a table of top U.S. importers of Venezuelan crude by refinery, click on [ID:nN28252514])
Caracas could offload parts of Citgo, but an outright sale would be complicated by the fact that its refineries were pledged as collateral for recent loans — and looks unlikely given the poor financial health of the U.S. refining sector.
Defenders of Citgo say the refining network gives PDVSA a guaranteed home for much of the heavy, sour crude it sells. Citgo’s plants have deep conversion units, which maximize the yield of lighter, more profitable products from the less expensive but difficult to process Venezuelan oil.
PDVSA SEEKS FUNDS, ISSUES MORE DEBT
“We are evaluating (the Citgo situation) as always, and will make an announcement if we have a firm sale,” Venezuelan Oil Minister Rafael Ramirez said on Wednesday.
One of the main factors behind Citgo’s financial difficulties looks to be a change in 2008 to contracts on the supply of Venezuelan crude, which raised Citgo’s costs.
By contrast, Chavez said he was happy to have sold PDVSA’s stake in the Ruhr Oel refineries to Russian state giant Rosneft (ROSN.MM), partly because they processed no Venezuelan oil.
In a televised speech this week, the president estimated Citgo’s price at more than $10 billion and said the country would at least get a reliable income from the interest if the company were sold and that money just put in the bank.
While many factors argue strongly against the sale of Citgo, the energetic Chavez is nothing if not unpredictable.
Another reason his government may want to offload Citgo is that PDVSA is short of cash and has big commitments, including developing ambitious projects with a range of foreign partners in its vast Orinoco extra heavy oil belt. [ID:nN11230969]
PDVSA’s first-half net profit fell 14 percent this year despite sharply higher revenues as it ploughed billions of dollars into social development schemes that are a cornerstone of the president’s self-styled “revolution”. [ID:nN19145206]
Caracas has sold parts of Citgo in recent years while sharply increasing its financial demands on the refiner, and now analysts say PDVSA has few fund-raising options left.
“It can only issue bonds on which it has to pay extremely high interest rates, or negotiate with large customers against future oil deliveries, as it did recently with China,” said Oliver Campbell, a former finance coordinator at PDVSA.
There is a lot of interest from foreign investors in the bonds issued by Venezuela’s government and its state oil firm, which offer high returns but are consistently rated by risk indicators as having the world’s greatest chance of default.
This month, PDVSA launched another $3 billion bond in its latest bid to juggle its many obligations to service providers, nationalized companies and social spending. [ID:nN25262594]
Speculation about any sale of Citgo has also jacked up interest in the $300 million of notes that were issued by the U.S. refiner and mature in 2017, secured by its refineries, its inventories and a portion of its accounts receivable.
“If Citgo is sold, these bonds with an 11.5 percent coupon will fly,” said Russ Dallen, head trader at Caracas-based BBO Financial Services. (Editing by Frank Jack Daniel and Dale Hudson)