Petroleum and Investment Grade Rating

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Petrolera Zuata, Petrozuata C.A. case study

“La Apertura” (The Opening)
• Target: Orinoco Belt heavy/extra heavy oil accumulation (biggest known in the world) • Key Strategy: Opening Venezuelan oil sector to foreign oil companies • How: Profit sharing agreements, operating service agreements, strategic joint-venture associations • Ownership: PDVSA or subsidiaries contribute10 years), fixed interest rates, fewer more flexible covenants, larger amounts. – Cons: fund must be raised in a lump sum. Excess funds create a drag on earnings (negative carry)

• Rule 144A market (private placement market):
– Pros: Like public bonds + speed, underwritten within six months – Cons: only qualified investors can invest in them Conditions needed: hot markets and investment grade rating

What kind of debt to choose?
• The sponsors should use 144A (private bonds) to fund the deal because of the important advantages and the significant disadvantages which can arise by using the other debt kinds.

– Rule 144A has big advantage of time – Markets seem to be going in the right direction (Hot markets) – What else is needed?... (on the next slide: Investment grade)

Investment Grade Rating
• Agencies look at 3 main factors: sponsors’ creditworthiness, project’s economics and Venezuela’s sovereign risk. • Problem: Venezuela’s rating: S&P “B” Moody’s “Ba2” • Petrozuata is strictly connected with country’s risks because it is controlled by PDVSA which is Venezuela’s state oil company 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 investment grade rating • Investing in Petrozuata is indirectly investing in DuPont • If you invest in Petrozuata your real investment is also in Venezuela and DuPont • Petrozuata project has a very good structure and business projections • Same comparables with other oil companies operating in other countries and having...
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