The collapse of Petroleos de Venezuela: the turn of HOVENSA?

HOVENSA is a joint venture between subsidiaries of Hess Corporation and Petroleos de Venezuela, S.A. (PDVSA) and operates a refinery on the Caribbean island of St. Croix in the United States Virgin Islands. This refinery originally had a crude oil processing capacity of 500,000 barrels per day, although this year it has reduced this capacity by 150,000 barrels per day, in order to improve the economics of the operation. The rating agencies have downgraded HOVENSA. Fitch has gone from  from BB+ to BB-. Standard Poor Ratings Services lowered its debt ratings from BB- to B, adding that the outlook “remains negative”. These ratings could go much lower if the parent companies, Hess and PDVSA, do not continue support the operations financially.

And this is the main problem. They either do not want or cannot afford to do it. Since 2008 PDVSA and Citgo have been talking back and forth, very hush hush, on the possibilities of Citgo getting in debt in order to buy the shares of PDVSA in the refinery. This would seem logical since Citgo is the company that has been buying much of the products of the refinery. However, such an action would further weaken the financial profile of Citgo and could simply transfer the problem from point A to point B within the PDVSA system.

Sources within PDVSA tell me that HOVENSA appears to be "in extremis" financially,  since the shareholders will not inject sufficient fresh money into the company. Insufficient investment has already made the refinery vulnerable to significant environmental fines. Fitch’s published report suggests that the situation of the company might be approaching the critical stage.

Of course, PDVSA’s problems are further compounded by its frantic efforts to get rid of Citgo. The company is being offered to Russian, Arab and Chinese groups. However, the information I have is that these are not world class but, rather, second or third class groups. Offers could be coming by the end of the year but I believe they will be highly unsatisfactory and could lead to nothing.

The financial agencies report that at the end of 2011 HOVENSA had “a cash balance of $32 million (June 2011”. This was defined as “less than adequate liquidity”, requiring the parent companies to inject fresh money through, at least, 2013. The agencies warn that capital requirements, poor refining margins and lack of parental financial support could put HOVENSA against the ropes.

It seems as if one of the early jewels in PDVSA’s international crown might be going down the financial drain.













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