The Devil's Excrement

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.

For the first time since it became public that ExxonMobil had obtained Court orders to freeze PDVSA’s assets, President Hugo Chavez referred to the matter and he did it in his characteristic bully style, threatening to cut off oil supplies to the US and explicitly saying that he has given out orders to do so if any of PDVSA’s property is seized.

While Chavez can do anything, nobody really knows how he may react to anything, and I am sure markets will be rattled tomorrow when they open, the truth is that if this were truly what he intended to do, he would have ordered it already, because the order of attachment by a New York Court has already frozen US$ 325 million that PDVSA held in an account in New York. Thus, saying that “if you truly freeze something…we will stop sending oil to the US” is just playing for the gallery, it already happened. So, why wait?

The truth is that not only did Chavez illegally take over ExxonMobil’s investment in Venezuela, but has yet to compensate that company. Moreover, the whole thing has been badly handled in the belief that ExxonMobil will simply accept whatever PDVSA offered, like the state controlled oil companies of Norway and France did with their own project.

In fact, Chavez should have known that these injunctions were requested by ExxonMobil as far back as December, a fact that was hidden from the Venezuelan people. At least in the case of the US Court, ExxonMobil introduced the injunction in the Souhern District of New York on December 27th. and that same day Judge Batts ruled on the case, filed under number 07-CV-11590 and ordered PDVSA’s property attached. Moreover, the Judge ratified the measures on January 2nd and again on Jan. 8th. after talking to PDVSA’s lawyers. It was not until January 24th. that PDVSA’s lawyers actually replied to the injunction in the US.

Thus, while Minister Ramirez accuses the media of not informing or lying, it turns out that it is the Chavez administration that has been lying or hiding the information from the “people” that they claim to love so much and want to take into account in their decisions. Thus, if the letters of attachment had not reached the banks, we probably would not yet know of the injunctions, proving once again that Chavez is running Venezuela as if it was his private property and with total disregard for the law and the right of information given by his 2000 Constitution.

Thus, we will still have to find out if this is just another Chavez bully moment or if he means it. In fact, the injunctions by themselves create many problems for PDVSA that may actually make it more difficult for PDVSA to export oil not only to the US, but to many other places and actually get paid for it.

The question is whether Chavez could benefit from such a move. I doubt it. If Venezuela were to stop exporting oil to the US, it will find it difficult to export the same oil elsewhere because of its characteristics (high sulfur). This will create more financial problems in Venezuela than anywhere else, where shortages are already present and the population is tired of promises and inefficiencies. Thus, if Chavez dared to do it, it will likely become a defining moment in his demise, as people have put up with his rants and ideology because there were unrealized promises attached to them. But somehow it seems this is the wrong time to ask the people to sacrifice in the name of his revolution.

The ExxonMobil injunctions would only become significant if Chavez were to take the “nutty” road, as I suggested the first day I heard about them, such a road will only be bad for us Venezuelans but I still believe there is a very low probability that Chavez will take it.

P.S. Just out of curiosity, the firm representing Venezuela Curtis, Mallet-Prevost, Colt & Mostle is the descendant of the one that represented Venezuela in its case against Great Britain over the British Guayana, not a promising precedent…