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01 Feb 2000
MOODY'S CONFIRMS RATINGS ON ALL PDVSA VENEZUELAN PROJECTS
Moody's Investors Service confirmed the following ratings on heavy oil project financings in Venezuela: Petrozuata Finance Inc. at Baa2, Cerro Negro Finance, Ltd. at Baa2, Sincrudos de Oriente Sincor C.A. at Baa3 and Fertinitro Finance Inc. at Baa3. The outlooks are stable. These ratings were placed on review on September 9, 1999, due to the rating agency's concerns that risks to debtholders are increasing as a result of moves by the government of Venezuela to increase its control over the management and strategic direction of Petroleos de Venezuela S.A. (PDVSA). These concerns extended to potential changes in Venezuela's legal framework for oil and gas investment and possible limits on PDVSA's ability to meet its financial commitments to the projects.
Moody's confirmation is based on the following conclusions:
- All of the projects continue to progress toward completion. Although there have been cost overruns, these are being met by sponsor contributions in the form of equity or subordinated loans that rank behind the rated bonds and bank debt.
- PDVSA continues to bear its share of obligations to the projects, including cost overruns, and has budgeted for the projects in its capital spending over the next few years. Sincor represents the project with the highest remaining investment obligations from Sponsors. With a more positive outlook for oil prices in the intermediate term, the company should have the cash flow to fund all its commitments.
- The risk that the government will interfere with PDVSA's ability to fund its commitments is mitigated by the need to continue to attract foreign investment and to retain access to the global capital markets. In addition, under reasonable assumptions of oil prices, the projects will earn an adequate economic return to Venezuela.
- Although future projects may be subject to differing fiscal or legal regimes, the government continues to voice its intent to leave the current projects in tact and its support for the development of heavy oil and of the natural gas sector. The projects are currently attracting billions of Dollars in foreign capital for development and supporting much needed job creation.
- The projects continue to benefit from sound legal structures. Once these projects achieve production, U.S. dollar payments flow through an offshore trustee subject to New York law under irrevocable instructions that cannot be altered, thereby protecting the cash flows for the debt holders. Government interference with the legal framework would have a negative impact on its ability to access the foreign capital markets.
Moody's warns, however, that PDVSA will face uncertainties for some time to come. The Venezuelan political system is undergoing seismic changes even as the country faces enormous economic and fiscal pressures. Recent devastating floods have imposed additional financial burdens on the country. PDVSA will remain the entity that generates most of Venezuela's foreign exchange and thus will remain the vehicle for funding social programs and subsidizing economic shortfalls. It will remain a tempting target for the satisfaction of the government's future cash flow needs.
In monitoring the progress of the projects, Moody's notes that they have all encountered several similar challenges, albeit differing in magnitude. Brief labor strikes and subsequent increased labor costs have impacted the construction budgets of all the projects and will affect ongoing expenses as well. The overvaluation of the Bolivar on an official basis, although partly mitigated by local inflationary assumptions, has also been a large factor in the cost overruns of the projects.
The first of the heavy oil projects, Petrozuata Finance Inc. ("Petrozuata"), has been hit the hardest, with estimated cost overruns of 28%, primarily related to the Bolivar and labor costs. While large in magnitude and certainly impacting the expected sponsor returns, the overruns are being funded with Sponsor equity or subordinated debt and, at this juncture, projected debt service coverage does not appear to be unduly affected. Reservoir performance has also been troublesome to the project, requiring an accelerated drilling program and different drilling techniques to bring output up to expectations. Higher than expected prices for early diluted oil of 92,000 bpd are helping to offset these higher costs to some degree. Petrozuata is 85% complete, with projected completion scheduled for October, 2000 at a total construction cost of $3.4 billion, including cost overruns and accelerated drilling.
Cerro Negro Finance, Ltd. ("Cerro Negro"), 43.5% complete, has expended $870 million and currently forecasts construction overruns of 6%. As in all the projects, cost overruns will be funded by either Sponsor equity or subordinated debt when required. Cerro Negro field activity is showing higher than expected production, averaging 1,400 to 1,600 bpd per well. Early diluted oil production of 60,000 bpd has had to bypass the central processing unit, which is experiencing construction delays, but is being processed as is at the Chalmette refinery in Louisiana, a joint venture between Mobil and PDVSA. Project completion is expected to occur June, 2001 with a construction cost of $1.58 billion.
Fertinitro Finance Inc. ("Fertinitro"), an ammonia and urea project utilizing low cost associated gas for feedstock, is 86.5% complete with full completion expected by the fourth quarter of 2000. Total construction costs are forecast at $852 million, 13% over plan. The project faces different product price concerns as its markets have generally improved only 13% over the historic lows of a year ago, while the oil prices facing the heavy oil projects have more than doubled over the prior year. FertiNitro enjoys a $0.50/MMBtu feedstock price, the lowest in the industry, escalating only when ammonia sales prices reach certain levels. Combined with permanent closures and shutdowns of higher cost facilities occurring in its industry, Fertinitro's competitive position remains intact.
Sincrudos de Oriente Sincor C.A. ("Sincor"), the latest of the heavy oil projects under construction, faces concerns over its ability to fund the large $3.7 billion expected construction obligations. The project, which is about 33% complete, was unable to economically float its bond offering in August 1998, when the emerging bond markets collapsed. The Sponsors, including PDVSA with a 38% share, agreed to fund all the obligations above the bank commitments of $1.2 billion. Moody's regards PDVSA's ability to fund its share of the obligations as an increased near-term risk, particularly in light of the potential for increased government reliance on PDVSA in the next few years. However, we have reviewed the capital budget of PDVSA and these obligations do not constitute an overly large percentage of those figures over their term. Sincor will upgrade its product to a significantly higher 30-32o API light crude as opposed to the heavier, sour crudes of the other projects. This offers a higher margin potential going forward. Sincor's current forecasts indicate a 3.7% construction cost overrun, with $3.79 billion expended to date.
CONFIRMED RATINGS ARE:
Petrozuata Finance Inc. - Backed Senior Secured (U.S. dollar) Baa2
Cerro Negro Finance, Ltd. - Backed Senior Secured (foreign currency) Baa2
Sincrudos de Oriente SINCOR C.A. - Senior Secured Bank Credit Facility (foreign currency) Baa3
FertiNitro Finance Inc. - Backed Senior Secured (foreign currency) Baa3
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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