Petroleum and Investment Grade Rating

Petrolera Zuata, Petrozuata C. A. case study La Apertura (The Opening) Target Orinoco belt out fleshy/extra heavy petroleum color accumulation (biggest known in the world) Key Strategy Opening Venezuelan oil sector to immaterial oil companies How Profit sharing agreements, operating service agreements, strategic joint-venture associations possession PDVSA or subsidiaries contribute10 years), fixed interest rates, fewer more flexible covenants, big amounts. Cons fund must be raised in a thud sum.Excess funds create a drag on earnings (negative carry) chemical formula 144A market (private placement market) Pros Like public bonds + speed, underwritten within six months Cons all qualified investors can invest in them Conditions needed hot markets and enthronement grade rating What kind of debt to choose? The sponsors should use 144A (private bonds) to fund the mitt because of the important advantages and the significant disadvantages which can arise by using the oppo site debt kinds. Rule 144A has big advantage of time Markets seem to be tone ending in the right direction (Hot markets) What else is needed? (on the next slide investing grade) Investment Grade Rating Agencies look at 3 briny factors sponsors creditworthiness, exteriorises economics and Venezuelas sovereign risk. Problem Venezuelas rating S&P B Moodys Ba2 Petrozuata is stringently connected with countrys risks because it is controlled by PDVSA which is Venezuelas state oil social club and operates in Venezuela If Venezuela defaults on its debt Petrozuata will default too unless Conoco Inc. is a subsidiary of DuPont which operates worldwide and has enthronisation grade rating Investing in Petrozuata is indirectly investing in DuPont If you invest in Petrozuata your real enthronisation is also in Venezuela and DuPont Petrozuata project has a genuinely right(a) social organization and clientele projections Same comparables with an opposite(prenominal) oil compani es operating in other countries and having investment rate grading Ras Laffan example of oil company having higher(prenominal) rating than the country in which it operates(Qatar) In order to see investment grading it is very important to have DuPont in the issue If rating agencies consider the fact that Petrozuata will repay its debt although Maraven defaults on its recess of debt because DuPont wants to mantain its good reputation it might obtain an investment grading If Venezuela is purely linked to Petrozuata and has a B then Petrozuata should have at least a B rating plus a considerable incentive because the risk is diversified into DuPont Projects base case DSCR would likely have to exceed 1. 0X Break-even point low enough so the project can cover all operating and financing costs if oil prices fall substantially Is it a good deal? We would invest in project bonds as they will likely yield a higher return comp bed to the 21% cost of equity. Factors that need to be c onsidered Hierarchy of payments is good (referred to Cash Waterfall) Balance Sheet and Income statement suggest PDVSA and DuPont are supposed to be solid companies Oil prices are not that volatile fluctuating but arresting or so a price among $20 and $25 per barrel (suggested nominal break-even price in 2008 $8. 3 per barrel) Lower operating costs with respect to competitors (cash operating cost around $3. 19 against industry median at $8. 55) More than enough heavy crude oil reserves to sustain the planned production fit DeGolyer & MacNoughton (U. S. based oil consulting firm) Projects design in conformation with good industry practice complying with Venezuelan and International environmental laws as stated by Stone & Webster Overseas Consultants, a U. S. ngineering and consulting firm What should Conoco lodge in into account? True problem is not very favorable business environment Theoretically, if all contracts are respected and power structure of payments holds, the only entities front risks are PDVSA and DuPont with their capital investment Banks and whoever invests in project bonds according to the hierarchy of payments should be a safe investor Uncertainty in governments future actions could be very harmful.Remember that in January 1976 the Venezuelan government nationalized the domestic oil industry and the compensation package was only 20% of market value (according to foreign oil companies). Lending to Petrozuata is indirectly investing in Venezuelas business environment and doing business with the government as PDVSA is atomic number 6% government owned, which has a non-investment grading by rating agencies What should Conoco do? bow out carefully in consideration what has been mentioned Make an in depth abstract on Venezuelas macroeconomic issues Try to revise the Off get rid of agreement to be sure of having the right to buy the 104,000 BPCD at the pre-fixed price If benefits exceed these further costs then consider equit y investment Otherwise the best move would be to take some other entity in the deal to diversify risks even more Personally, we would be very cautious with investing equity capital as Conoco.