Venezuela is beset by recession, crime and stagflation. President Nicolas Maduro has cracked down on state-run oil company PDVSA; he has arrested the former head of PDVSA and over 60 executives with ties to the company. The purge has threatened PDVSA’s operations and its decline in oil production has wreaked havoc on a country whose main export item its oil.
Now PDVSA is have a difficult time paying its bills. A few months ago China’s oil and gas company Sinopec sued PDVSA for conspiracy to commit fraud:
Chinese oil and gas company Sinopec is suing PDVSA for $23.7 million plus interest and damages, accusing the Venezuelan company of breach of contract and conspiracy to defraud.
According to court documents filed on Nov. 27 in Houston, Texas, Sinopec USA claims that PDVSA has failed to pay for half of a $43.5 million order for steel products. The lawsuit was first reported by the Financial Times on Wednesday.
Venezuela and PDSVA owe tens of billions in bonds to investors. If PDSVA has trouble paying China – an important strategic partner – where does that leave U.S. oil services firms like Halliburton (HAL) and Schlumberger (SLB), Weatherford (WFT) and Baker Hughes, a GE Company (BHGE)?
Halliburton
Dealing with PDVSA can be a “Catch-22” – if you do not help them finance equipment you might lose business. If you offer financing you might lose part or all of your investment. Halliburton currently has over $400 million of exposure to PDVSA. In Q2 2016 it exchanged $200 million of accounts receivable for an interest-bearing promissory note and recognized a pre-tax loss of $148 million. Halliburton did this for its “primary customer in Venezuela” which I assumed was PDVSA. The carrying value of the note was $116 million at Q3 2017. PDVSA missed a scheduled principal payment on the note in Q3 as well. Total outstanding trade receivables in Venezuela is currently $429 million.
In my opinion, Halliburton could sustain a $429 million write off of receivables. In many ways it has recovered from its failed merger with Baker Hughes that resulted in it having to pay a break-up fee of several billion dollars. Halliburton now has $1.8 billion in cash and over $5.5 billion in working capital. The biggest risk to Halliburton could be a potential pullback in drilling activity and/or oilfield services in Venezuela. In Q3 Halliburton generated $530 million in revenue from Latin America, up 4% sequentially. The region represents 9% of total revenue. If Venezuela’s problems metastasize to the rest of the region then Halliburton could experience a sharp decline. Revenue from Latin America was as low as $415 million in the year earlier period. Who is to say it will retest those lows?
Other Oilfield Services Companies
At Q3 2017 Schlumberger had a promissory note with a fair value of $184 million with its “primary customer” in Venezuela. The note was as much as $700 million previously; Schlumberger experienced an impairment charge of $460 million in Q3. I also understand that Weatherford (WFT) and Baker Hughes have exposures to Venezuela of $158 million and $100 million, respectively.
Schlumberger received 12% of its Q3 revenue from Latin America. Its revenue from the region fell 8% sequentially. It gave me the impression Schlumberger’s management has decided to cut exposure to the region, particularly given its sizeable write-off in Venezuela. Weatherford received 16% of its revenue from Latin America. Of the major oil services firms Weatherford has the worst balance sheet. Its $7.9 billion debt load currently exceeds 12x run-rate EBITDA. A pullback Latin America could hurt Weatherford’s operating income when it can least afford it.
Conclusion
Of the major oil services firms Halliburton appears to have the most exposure to Venezuela from a capital standpoint. It has been growing revenue in the Latin America, so a pullback could hurt growth prospects going forward. I believe Halliburton and Weatherford have the most to lose by a pullback in Venezuela and/or Latin America. I rate HAL a hold and WFT a sell.
On Trump And The Global Economy
Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
