Oilfield Services Companies To Shun Work In Venezuela

Venezuela, the country that accounts for one-fifth of the world’s proven crude oil reserves, is under the threat of a credit default. Extreme government overspending, mismanagement of natural resources, and severe corruption had pushed the country into a recession in 2014. However, things have worsened lately, as the state-backed oil company, PDVSA, failed to pay hundreds of millions of interest expense last week. Though the company claimed that the payment had been released, and has not been received due to payment gateway issues, the company’s track record of debt payments has not been exceptional.

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According to Reuters, PDVSA has not made payments of $540 million to India’s top oil producer, ONGC, for the last six months, for an investment in an energy project in Venezuela. Also, PDVSA has previously used a Russian state-owned bank and another Indian energy company as intermediaries to make payments. Further, the company has made a series of defaults on payments to its suppliers, particularly the oilfield services, storage, and shipping companies, in order to prioritize their debt repayments, but has failed miserably. This reflects poorly on the company since it is highly dependent on these suppliers for development of energy projects that form the core of the country’s economy.

To make things worse, the President, Nicolas Maduro, recently announced the country’s plans to potentially restructure roughly $60 billion of its foreign debt, of which a majority is held by PDVSA. The news is being seen as a signal of a possible credit default, which could serve as a last nail in the coffin of the country’s downfall. This has sent a wave of anxiety for all the companies/suppliers that have invested or have a presence in the country.

Oilfield Services companies, such as Schlumberger and Halliburton, are likely to feel a pinch of the restructuring of Venezuela’s debt. Halliburton, the world’s third largest oilfield service provider, has an investment of $727 million in the oil-dominant country, including $429 million in outstanding bills, according to its most recent financial report. Earlier this year, the company had accepted promissory notes from Venezuela in exchange for $375 million of prior debts. However, it had to write-off $262 million of these notes during the year due to payment issues. This has forced the company not to accept any promissory notes as payments and not to seek any new work in the country in the future. Further, there is a strong possibility that the current outstanding bills will also be written-off in the coming quarter, which is likely to impact the company’s earnings.

On similar lines, other oilfield service contractors such as Schlumberger ($700 million), Weatherford International ($158 million), and Baker Hughes ($100 million) also have notable outstanding amounts in the form of receivables and promissory notes from the country. Given the already tight commodity price environment, unforeseen write-offs of outstanding bills could be a strong hit on the profitability of these companies. That said, crude oil prices are likely to remain unaffected by Venezuela’s crisis. This is because the country accounts for only 3% of the total world production, despite holding more than 20% of the proven oil reserves.

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