Bond issue highlights Venezuela-owned Citgo's woes | Reuters

Bond issue highlights Venezuela-owned Citgo's woes

Tue, May 25 2010

* Citgo lost $128 million in Q1 2010

* Chavez summons refiner's management

* Firm to guarantee bonds with refineries

By Marianna Parraga and Daniel Wallis

CARACAS, May 25 (Reuters) - A forthcoming $1.5 billion bond issue by Citgo, the U.S.-based refining subsidiary of Venezuela state oil company PDVSA, will make it harder for the parent company to tap Citgo to fund domestic social programs.

PDVSA, main financier of President Hugo Chavez's socialist "Bolivarian" revolution, has had cash flow problems and been hit by lower oil prices. Critics say the company, Latin America's biggest crude producer, has been mismanaged. [ID:nN13153698]

The government has increased its demands on Citgo in recent years and sold some assets. This appears to have hit Citgo's finances at a time when the U.S. refining industry has seen declining sales of its products.

Terms of the bond issue, due in 2017 and 2020, restrict Citgo's ability to sell assets or take on more debt since it is guaranteeing the bonds with its three U.S. refineries, other assets, inventories and accounts receivable.

That will make it less useful as an extra source of revenue for PDVSA. Chavez, however, insists that the company boost payments to the state and hire more Venezuelans.

"I want to see all the directors here. They must give account here. This is not a gringo company," the president said in a televised speech early on Tuesday.

According to the bond prospectus, Citgo incurred a $201 million loss in 2009, versus a profit of $801 million in 2008. It suffered a $127.7 million loss in the first quarter of 2010.

Richard Obuchi, a professor at Caracas's Institute of Higher Studies in Administration, said PDVSA's management had behaved erratically with Citgo, partly due to a debate in Chavez's government about replacing the United States -- the main customer for Venezuelan oil -- with other buyers.

"PDVSA will have to assume a credible compromise that does not reflect negatively on Citgo in order to reduce risk in this issue and for it to be a success," Obuchi told Reuters.

"SUBSTANTIAL INDEBTEDNESS"

Citgo's losses last year and sharp downturn so far in 2010 came after two years in which profits slid while the company still paid high dividends to parent PDVSA. [ID:nN01166305]

At the end of the first quarter of 2010, according to the bond documents, PDVSA's debt stood at about $2.4 billion, including loans, securities and rent obligations, compared with assets of $8 billion.

"Our substantial indebtedness could impair our financial condition and our ability to fulfill our debt obligations, including our obligations under the notes," the company said.

One of the main reasons for Citgo's financial woes appears to be a change in 2008 to contracts on the supply of Venezuelan crude to the subsidiary, which raised Citgo's costs.

The refiner's competitive advantage is its ability to convert heavy crudes, which are usually cheaper, into high-quality products for the North American market, experts say.

But the price differential between light and heavy crude narrowed last year, and as a result Citgo said its refining margin fell to $6.61 per barrel in 2009 from $13.50 in 2007.

In the first quarter of 2010, this margin slid further to $6.12, even though retail prices rose for its products.

Citgo said weaker demand in 2008-2009 due to deteriorating global economic conditions led OPEC members to cut production, with the reduction disproportionately related to lower-priced heavy sour crudes.

"Together, these market factors acted to compress our refined product margins and erode our historic crude differential advantage," it said in the prospectus.

"As economic conditions improve and demand ... increases, we believe OPEC will relax restrictions on production, which should increase the supply of heavy sour crudes and contribute to a widening of the light/heavy differential, improving margins for complex refineries such as ours." (Editing by David Gregorio)

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Bond issue highlights Venezuela-owned Citgo's woes
| Reuters

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