Today, El Universal says that Ecoanalitica calculates that the value of Cerro Negro as a firm is around US$ 3.4 billion and Exxon’s compensation should be in the range of US$ 1.3 billion, well below the injunction values of US$ 12 billion requested by ExxonMobil.
The number seems low to me when compared to similar companies abroad. The problem is that it is not always easy to make such comparisons not only because the companies are in different countries, but also because Cerro Negro as a company had no future expansion, while companies like Suncor in Canada, against which we can measure Cerro Negro are aggressively expanding their productions.
But we can take a stab by looking at the numbers. Suncor today had a Price/Earnings ratio of 22, a Price to sales ratio of 3, a price to cash flow of 13.4 and a Price to Book ratio of 4.
While I have not seen a cash flow statement from Cerro Negro or earnings recently, we can try to narrow it down.
The easiest one is Price to Sales. Suncor sells US$ 13.5 billion per year, while my estimate for Cerro Negro sales are US$ 3.0 billion. Thus, this would suggest a price of US$ 9 billion for Cerro Negro, except that you would have to lower the value not only because it is in Venezuela, but also because taxes and royalties are much higher in Venezuela for these companies. How much higher? Well, royalties are 30% in Venezuela and the tax rate is 50%, compared to 16.5% and 25% in Alberta.
In terms of earnings, I estimate Cerro Negro makes about US$ 350 million a year, which would give US$ 7 billion if it had a similar P/E as Suncor, but it should be lower because of the higher risk premium of being in Venezuela.
In terms of book value, My memory suggests that this was around US$ 1.5 billion which places an equivalent number of 4 for Suncor around US$ 6 billion.
As you can see, all of the numbers I get are above US$ 6 billion which should be an upper bound given that this is a project in Venezuela. If we assume that the risk premium shaves off 25% of the value, which is reasonable, then the numbers would be from US$ 4.5 billion to US$ 7.2. Since ExxonMobil owned 42.5% of Cerro Negro, then this implies that ExxonMobil is owed somewhere between US$ 1.9 and US$ 3 billion, well below the numbers of the injunction and certainly not something PDVSA (or Fonden) can not afford to pay at this time.
The main difference between Ecoanalitica’s estimate and our own is that Ecoanalitica uses the value of the settlement between PDVSA and Sincor as a benchmark, but I believe this was a substantially low value than the true worth of that company.