Venezuela Escapes Bankruptcy… But Oil Production Continues To Plunge

Tyler Durden's picture

Submitted by Nick Cunningham of OilPrice.com

Venezuela just dodged a bullet, pulling off a last minute bond swap with creditors. The deal only buys Venezuela a little bit of breathing room, and a default at some point next year or the year after is not out of the question. Either way, the South American OPEC nation’s oil production is falling and will only continue on a downward trajectory.

Venezuela’s state-owned PDVSA avoided default at the eleventh hour, getting enough creditors onboard for a debt swap. The oil company had repeatedly offered creditors to exchange debt set to mature this year and in 2017 for payments spread out over the rest of the decade, a proposal that would allow the company – and the sovereign government – to technically avoid default.

But after investors rebuffed at least four offers for a debt swap due to unfavorable terms, they finally agreed to a deal on Monday to swap a portion of the $7.1 billion that PDVSA had due in the coming months. PDVSA had warned a few days ago that a default would come as soon as this week if creditors did not sign on. "Low oil prices will adversely affect the company's ability to generate cash flow from operations, which will impair the company's ability to make scheduled payments on its existing debt, including the existing notes," PDVSA said in a statement last week.

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With few options left, it was in both PDVSA’s and the creditors’ interest to make a deal, according to Siobhan Morden, head of Latin America Fixed Income Strategy at Nomura Securities. “It’s logical that this exchange goes forward and PdVSA accepts whatever cashflow relief the market is willing to provide so that muddling through continues.”

But even if it can avoid default this time around, the Venezuelan government only has foreign exchange reserves of $12 billion, a figure that is dwarfed by its debt load.

The fallout from a default would be terrible for Venezuela, but how the situation plays out is unknown. PDVSA’s assets overseas could run into trouble. “I wouldn’t be surprised if you see new precedents in terms of being able to seize oil assets on boats, because the U.S. government is going to be very anti-Venezuela obviously. For sure Citgo refineries get seized,” Eric Fine, bond fund manager for Van Eck Global, told Forbes in an interview. He also warned that a PDVSA default would almost certainly be followed by a sovereign default. Not only are the finances of the two entities intertwined, but once the company defaults, the government would probably lose access to financial markets as well, so paying off debt will merely be a waste of the little bit of cash it has left. For this reason the government has been intent on meeting its obligations even as people go hungry in the streets.

While PDVSA is flirting with insolvency, Venezuelans are much more focused on the country’s political crisis, which is just as bad as the economy. Last week, the government of President Nicolas Maduro cancelled a vote that threatened to remove him from office. For more than a decade, Venezuela, under the late President Hugo Chavez and then Maduro, has seen a steady erosion of its democratic system. But cancelling the recall election is “the most blatant” move yet, says Siobhan Morden of Nomura Securities.

President Maduro, meanwhile, has been undertaking some shuttle diplomacy to oil producing countries in recent days to get them on board for the pending OPEC production cuts. But while he was in Azerbaijan and Iran, Maduro’s problems at home began to bubble over.

On Sunday, the opposition led Congress pressed to put Maduro on trial for violating democracy. The heated session even saw injuries inside the legislature as the two parties broke out into fist fights. The opposition, once fractured but now increasingly united against Maduro’s overreach, is planning a major protest on October 26. The Eurasia Group, a political risk firm, said the cancellation of the recall vote leaves no other avenue for an outraged public than to take to the streets, “increasing the near-term risk of a social eruption amid food shortages and soaring inflation.”

PDVSA may have just avoided default but its poor position likely means that things will continue to deteriorate. The battered state-owned firm is already dealing with declining production and has no cash left to conduct maintenance. Drilling is at a standstill and PDVSA is already in arrears to oilfield services companies like Halliburton and Schlumberger. Output is down 11 percent in the 12 months ending in September, and more declines are expected. In an October 23 article, The Wall Street Journal reported that PDVSA has been reduced to flaring gas and burning oil because it does not have any money left to pay for processing equipment. So not only is production declining, but PDVSA is unable to even sell all of the oil and gas that is coming out of the ground.

It is hard to imagine things getting worse than they already are. PDVSA may have kicked the can just a little bit down the road, but Venezuela’s problems are not going away.

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LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) Oct 25, 2016 3:15 AM

More FREE $HIT FOR EVERYBODY will solve these problems.  They simply haven't done enough of it.  Just ask Krugman.

HowdyDoody's picture

It is strange how favored nations like Ukraine can go bankrupt, and the IMF still pours money into them, which just happens to be impermissible under IMF rules.

 

Boris Alatovkrap's picture

Remember Golden Rule, he who is hold gold is make it rule.

AVmaster's picture

When the oil workers are selling off their boots and coveralls for FOOD,

 

Something seriously wrong here...

 

^.^

 

But we already knew that. Socialists are batshit crazy...

nmewn's picture

Its quite obvious that "revolutionary socialist" prick Maduro never misses a meal as his people starve & languish thats for sure but I had to chuckle with wry irony at this...

"PDVSA’s assets overseas could run into trouble. “I wouldn’t be surprised if you see new precedents in terms of being able to seize oil assets on boats, because the U.S. government is going to be very anti-Venezuela obviously. For sure Citgo refineries get seized,” Eric Fine, bond fund manager for Van Eck Global, told Forbes in an interview."

...no doubt Obama's Car Czar...errr...ummm...sorry, his Oil Czar will plead the case for exactly that.

Cuz, ya know, the rule of law & contracts must be upheld at all cost!!!...unless you have a bond & a contract with GM ;-)

Manthong's picture

Y’know …

..the good news is that.

.it’s not like the US is orchestrating the complete collapse of their economy for the bankers or anything.

 

………..I think some bananas sound good for breakfast

 

Dark Daze's picture
Dark Daze (not verified) nmewn Oct 25, 2016 8:09 AM

Yes, well, seizing 'oil on boats' would be typical for you. And since you are bankrupt, I guess that is just about the last thing you can do to try to keep your heads above water. Just steal it and fuck the consequences.

Dark Daze's picture
Dark Daze (not verified) AVmaster Oct 25, 2016 7:51 AM

Au contraire, YOU ARE BATSHIT CRAZY.

GunnerySgtHartman's picture

With respect to Margaret Thatcher, Venezuelan socialism has obviously not run out of other people's money yet - there are still some people stupid enough to loan to them!

SillySalesmanQuestion's picture

I'm sure this was the plan all along, kill Chavez, destabilize their government, install puppet, bankrupt country, seize oil production and other oil related assets for pennies on the dollar.
Wash, rinse, repeat.

acheron2016's picture

I love a conspiracy theory (almost) as much as the next guy.  But Venezuela never needed a CIA coup.  ALL socialist states end this way.  USSR, Venezuela, or USA makes no difference.  The only variable is time.  As Margret Thatcher said "The problem with socialism is sooner or later you run out of other people's money".  

Venezuela continued the fantasy for a decade longer than it otherwise could have by seizing every privately held asset inside their borders.  But like every savage before them they learned Taking is a lot easier than Running.  A gun will make a man give you his gold.  A gun will not force a man to think.

Yes oil prices are down, blah blah, blah etc etc etc.  These are all symptoms.  The irreducible problem is lazy, stupid, shiftless people that want the good life riding on the backs of their betters.  Every people throughout history has gotten the nation they said they wanted.  This is why we have the old saying "Be careful what you ask for, you might just get it".

Debugas's picture

problem for Venezuela is that its only oil buyer is USA

that is why Venezuela will inevitably go bankrupt

Dark Daze's picture
Dark Daze (not verified) Debugas Oct 25, 2016 7:45 AM

WRONG. And A LIE.

China has fronted considerable money in loans to Venezuela and is one of their best customers. 

This is just the greedy sick pigs in the US positioning themselves for the next economic recovery. They want it all.

And it looks like fucks like you are trying to help them.

RedDwarf's picture

It would have been better if the bullet had not been dodged.  Now the elites and government will continue to lumber on, prolonging and deepening the misery.

Dark Daze's picture
Dark Daze (not verified) RedDwarf Oct 25, 2016 8:13 AM

Yes. It appears that way doesn't it. And they aren't even waiting around for Hitlery to be sworn in, they are doing it now. So, in the end, after all this crap that has been floating around in the US electoral process for 2 years now, it turns out that 'democratic america' can't even throw off their own shakles (shekels), let alone 'free' anybody else.

Going down for the count, very soon.

Ms No's picture

I take it these creditors are not China?  Last I heard it appeared that China had given Venezuela up for dead and stopped bailing them out in exchange for oil payments.   

83_vf_1100_c's picture

How many foreign companies did Venezuela nationalize? Fuck them. Let them sell their best women to the highest bidders for food and tp money.

Dark Daze's picture
Dark Daze (not verified) 83_vf_1100_c Oct 25, 2016 7:44 AM

Well said. Another 'entitled' and 'exceptional' American gives us his worthless fucking opinion. 

downwiththebanks's picture

The electoral commission postponed the recall vote (not canceled), upon realizing that a half-million or so signatures by the fascist MUD opposition were fake.  The author doesn't report the opposition calling for a foreign assisted coup in an extra-parliamentary session yesterday!  

"Please CIA, since we can't win an election even after you killed Chavez, please please help us stage a coup! Please!"

Fascist fanboys at ZeroHedge love them some CIA coups, we know.

pazmaker's picture

wow what fantasy world you living in?  I have family in Venezuela who are very familiar with the situation. They are not rich and in fact at one time were Chavez and Maduro supporters until they had no food to eat and saw Maduro and his cronies living fat on the hog!!  Did you ever stop to think that both sides are wrong or is that too difficult for you?

Maduro is corrupt as well as Chavez was.  They start a revolution for the "people" then they line their pockets and their friends and cronies pockets ans steal the country blind.  You can't blame that part on the CIA.

 

The opposition if they get in power will do the same thing in the name of democracy.  The people are screwed either way..the same as it is just about anywhere else in the world including USA.

gallistic's picture

Surprisingly little detail and facts from someone who claims proxy knowledge "because I have family in Venezuela that are very familiar with the situation".

BritBob's picture

Nicolas Maduro has been an avid supporter Falklands claim even speaking in CELAC on behalf of Argentina. What is the strength of the Argentina sovereignty claim? https://www.academia.edu/17799157/Falklands_-_Some_Relevant_International_Law

Looks like Maduro just wanted a distraction.  Yep.

 

 

Dark Daze's picture
Dark Daze (not verified) Oct 25, 2016 8:06 AM

I just read a Bloomberg article that indicates the US is ready to 'begin action' against Venezuela, specifically to bring charges against some guy who ran the national oil company from 2004 to 2014.

So my question is, who THE FUCK ARE YOU TO DECIDE. WHO MADE AMERICA THE WORLD'S POLICEMAN? I don't remember any vote in the UN. I don't remember any central american, latin american or European nation asking for that. It's exactly the same mindset that started the Vietnam war. Because from where I sit, your society is so sick and so fucked up that you can't even manage yourselves.

Of course the real answer is that this is just more US hegemony. Now that the neocons think they have permanently captured Brazil, they have moved on to Venezeula. They don't give a rats ass about the people, they just want the fucking money from oil. But of course, the real problem with Venezuela is tha they have an army, a big army, and they have the support of the Chinese and the Russians. So, lets see you 'exceptional' Americans invade them. It won't be like Granada. It will be hell and wall street jews and oil creeeps know it.

But you have to move fast now. Maduro and his cabinet have already made a deal with the countries business segment so now there are goods back on the shelves again and inflation is dropping like a stone. So you won't be able to fool the sheeple with the notion that it would be a 'humanitarian intervention'. Honestly, where your so called politicians get the moxy to do this shit is beyond me. Do you want hot wars all over the planet?

I hope Putin blows you fuckers up in fine fashion.

YOU HAVE NO FUCKING BUSINESSS IN ANY BODY ELSE'S BUSINESS. GET LOST YOU FUCKS.

Bopper09's picture

Uh, Israel made America the world's policemen.

Dark Daze's picture
Dark Daze (not verified) Bopper09 Oct 25, 2016 8:15 AM

Uh, Israel is scheduled for destruction, so they don't count.

Bopper09's picture

Let me guess, debt paid with more debt.  'Saved the day'

Dark Daze's picture
Dark Daze (not verified) Bopper09 Oct 25, 2016 8:18 AM

No actually, two things 'saved the day'. One, they gave all their gold to Goldman Sachs and two, their business elite came to a supply agreement with Maduro. This is, after all, entirely about gold. Gold from Libya, Iraq, Venezuela, Africa, even Canada. Whereever they can steal gold, they will.

What happened to the 'revolution'?

Iconoclast421's picture

This article should have a 10 year chart of Venezuelan oil production.

Atomizer's picture
Oil financial porn. How are Oil Exporters Financing Deficits?

We need new sucker's to invest our lagging balance sheet. 

Fuck you sand niggers. Go bury your head in the sand. 

Mantis Toboggan - M.D.'s picture

Is it wrong to root for the collaspe of this socialist country? Knowing that it's people are in dire situations?