Hugo Chavez Now Has No Choice But to Make You Money

by | published February 19th, 2010

I am in Gdansk, Poland, right now to address the North European Energy Security Forum, convened by European Parliament President Jerzy Buzek. I'll be writing next time on what is transpiring here, including some interesting developments we will use to turn a tidy profit.

But the global energy investment focus this week comes from another part of the world – a quite unexpected source at that.

What follows is a good application of my Rule #4 (there are 42 “Moors Rules,” by the way): “Learn how to make money with people you do not like personally.”

This one involves animosity in both directions.

Put simply, Venezuela's Hugo Chavez doesn't like Washington. And the feeling is mutual. He's not exactly the guy who jumps to mind when talking about generating return for American investors. But it is about to happen.

That's because the self-proclaimed “commander president” and his ill-advised socialist reform agenda are between a rock and a hard place. For all the bravado and blustery oratory, Caracas is witnessing a meltdown, as the global financial pinch becomes enemy No. 1. And there is only one place to turn…

The National Oil Company is in Trouble

Petroleos de Venezuela SA (PDVSA) is the country's cash cow. The national oil company needs to reverse declines in production, especially as international oil prices start climbing back up. If it can't, a dangerous combination of deepening recession and rising unemployment will accelerate what can best be called an oil-sponsored reform debacle.

The nation has plenty of crude reserves left. Unfortunately, they are located in the Orinoco heavy oil belt. This is highly viscous oil, requiring considerable technology to develop – technology PDVSA doesn't have. And Western companies that do have it were rather unceremoniously thrown out by Chavez in 2007.

While the likes of Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) sue to recover property nationalized, Venezuelan leadership has begun asking others back in.

As I learned recently, this needs to happen soon.

My place in the Bahamas is often used for oil parlays. A few weeks ago, PDVSA execs I've known for years came up to discuss an ongoing project, a refinery development I advise in Ecuador to process Venezuela's heavy oil. The conversations touched on their financial problems. And the crisis is much worse than I realized.

PDVSA has been living off of borrowed funds. How bad? I learned that the company's debt has grown almost 45% in one year, to some $23 billion. Not a good thing when the crude volume you need to pay it off is heading in the wrong direction.

Never regarded as a financial whiz, Chavez decided that the oil company should shoulder more social responsibility. Instead of only drilling for oil, it was suddenly required to import food. Much of the rising debt resulting from the president's inability to feed his citizens was passed on to PDVSA beginning in the second half of 2008… just when oil prices were tanking.

So what does all of this have to do with investors? Painting himself into a corner, Chavez now has no choice but to make us some money.

How to Profit by “Rescuing” PDVSA

Turning to the majors its president summarily tossed out only a few years ago, Venezuela now needs foreigners to rescue PDVSA.

For us, that's where the making money part comes in.

On February 11, the winners for two of three major fields in the Carabobo deposit in the Orinoco were announced. Prominent on the list are Chevron (NYSE:CVX), the Spanish-Argentinean major Repsol (NYSE:REP) and French Total (NYSE:TOT). In a separate agreement, Italian powerhouse Eni (NYSE:E) will be developing Junin-5, also in the Orinoco.

The need to start pumping oil big-time has just brought our investment prospects right back into the Venezuelan crude picture. But will Chavez live up to the bargain this time?

He has no choice.

It will take years to dig his economy out of the mess he put it in. For that, PDVSA revenues need to increase… and fast. That requires bringing in the companies able to extract the heavy oil.

But there is also another connection even more essential to the recovery picture. The national oil company is 100% owner of U.S. major retailer CITGO. It needs to feed that network as much Venezuelan crude as possible to improve the bottom line. Recovery is impossible without such a major end user.

In short, Chavez cannot now short change the American market without shooting himself in the foot (as appealing as that may be visually). CITGO is privately owned, so we have no equity move there. However, this time, we have access to the companies pumping the crude needed to service CITGO.

And that access hardly stops with Chevron, Repsol, Total and Eni.

Earlier this month, the five largest Russian companies, comprising what has become known as the National Oil Consortium, signed an agreement with PDVSA to work Orinoco's Junin-6 field. We have access to all of them: LUKOIL (OTC:LUKOF), Rosneft (via LSE:ROSN.UK), the Russian/British TNK-BP (OTC:TNKBP), Gazprom (OTC:GZPFY), and Surgutneftegaz (OTC:SGTZY).

Caracas has warmed up to the Chinese, too.

All three of the Chinese companies entering into agreements with PDVSA are also on our trading radar – CNOOC (NYSE:CEO), Sinopec (through Sinopec Shanghai Petrochemicals, NYSE:SHI), and national oil company CNPC (accessed via CNPC Hong Kong Ltd., OTC:CNPXF).

By deciding to pit Western, Chinese and Russian majors against each other, the Venezuelan president hopes to keep the upper hand and diversify sales. Frankly, we don't care about intentions. We now have 12 companies whose results we can play against each other.

Thank you, Mr. Chavez.


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