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PdV’s cash concerns

The Venezuelan company's plunging revenues show it is still struggling with lower prices and falling output

It's midway through August, and autumn is just around the corner, but Venezuela's troubled national oil company just got around to releasing its 2016 financial results. It's easy to see why they put it off as long as possible. The results point to a company that has been in steep decline. It's no surprise given its woes, but the figures help shed light on the depths of PdV's problems.

The combination of lower oil prices and falling output have gutted the firm's finances. Revenue for 2016 was $48bn, down a third from a year earlier and a 60% drop from the $121.9bn the company made in 2014. It is by far the least amount of cash PdV has reported earning in any year over the past decade. From 2006 to 2014, revenues averaged $110bn a year, dropping to a low of $73.8bn in 2009 during the global financial crisis and peaking at $134.3bn in the subsequent run up in crude prices.

The company can't blame it all on the drop in the oil price. The results also highlight the sharp decline in output, led by a freefall in production from Venezuela's mature oilfields. Total production, including natural gas liquids, fell nearly 300,000 barrels per day—a drop of around 11%—from 2015 down to 2.571m b/d. However, more recent data reported to Opec puts production excluding natural gas liquids at 2.1m b/d. Output from the western and eastern conventional oilfields like those in Maracaibo fell as low as 1.29m b/d in 2016, down a whopping 16% in just one year. Production from those fields has fallen by 30% since 2012.

PdV pinned its hopes of recovery on rising output from the Orinoco belt, one of the world's largest oil deposits where the company is working with Chinese, Russian, American and European companies, to fill this gap. But a string of costly new Orinoco projects simply have not materialised. Orinoco output last year was 1.28m b/d, just 100,000 b/d higher than it was in 2010.

Because of the steep declines in fields elsewhere, Orinoco production accounted for half of Venezuela's total output for the first time in 2016. This is no cause for celebration. Unlike the mature fields' light and medium crude grades, the Orinoco's heavy oil sells at a steep discount to Brent and WTI on global markets.

Exports hit

PdV's domestic refining business is arguably in even worse shape, and is suffering from years of underinvestment. The company's domestic refineries have a nameplate capacity of 1.303m b/d. But that is a fiction. Operational capacity has been falling for years and PdV processed 0.654m b/d at its refineries in 2016, just 50% of nameplate capacity.

Unsurprisingly, total exports took a major hit in 2016. Sales of crude and fuel products fell to 2.2m b/d, down 10% from 2015. The figure would've been even lower if it weren't for a steep drop in domestic fuel consumption resulting from the nation's economic crisis. Sales to the domestic market were down 25% since 2014, an unheard of level of decline for a country not at war.

Source: PdV

The financial results also shed light on some of the company's more opaque financial deals with China and Russia. In 2016, Venezuela sent 0.505m b/d in crude and fuel products—worth $5.8bn—to China to repay its oil-for-loans deals. The lower oil price is dragging out the repayment period for those loans, compounding PdV's problems. In 2014, PdV sent less oil to China (472,000 b/d) but was paying back the loans at a far quicker pace of $14.38bn. Although China has been flexible on the pace of PdV's oil-for-loan repayments, its financial help has been noticeably absent over the past 18 months as the company's finances have deteriorated.

Russia has stepped into that breach. The results point to the vital role Russia's Rosneft has played in propping up PdV's finances at a crucial juncture, extending a total of $1.485bn in advanced payments that have helped the state-run Venezuelan firm avoid defaulting on its bond payments.

Rosneft stepped in again in November as PdV was struggling to pay more than $3bn in bond payments. It extended one $500m advance guaranteed by an "option to buy shares in certain joint ventures", most likely related to Rosneft's $500m purchase of a further 23.33% stake in the PetroMonogas project that brought its share to 40%. At the same time, the companies signed a separate $485m advance backed up by 49.9% of Citgo—Pdv's US-based refining business—if Venezuela didn't make good on the deal. Considering PdV has in recent years put Citgo's value at around $10bn, it is an extraordinarily low figure. With another $3bn-plus in bond payments due in October and November, PdV may come calling on its Russian ally again.

Source: Petroleum Economist
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