PdV to lose Citgo, barring bond or settlement

Venezuela's distressed state-owned oil company PdV is on the brink of losing its most valuable remaining asset, US refiner Citgo, unless it posts a bond or reaches a settlement for an outstanding arbitration claim of up to $1.6bn.

A US federal judge late yesterday cleared the way for Canadian mining company Crystallex International to sell the shares of PdV Holding (PDVH), the indirect parent of Citgo Petroleum.

The writ of attachment issued by Judge Leonard Stark of the US District Court of Delaware ordered US marshals to start the process of selling PDVH shares at auction. The decision followed a hearing in which interested parties including Citgo and Russian state-controlled Rosneft argued unsuccessfully that the planned auction should not be allowed to proceed.

Stark also imposed a temporary stay on Crystallex to give Venezuela an opportunity to post a bond and appeal the court's order.

PdV has vowed to appeal the court's order that would allow New York-based hedge fund Tenor Capital Management, which now owns Crystallex, to auction PDVH shares to collect some $1.4bn in compensation and accrued interest for the expropriation of the company's Venezuelan gold mining project Las Cristinas. The April 2016 award was issued by the World Bank's International Center for Settlement of Investment Disputes (Icsid). Accumulated interest is believed to have increased the total debt to about $1.6bn.

PDVH owns 100pc of the shares of Citgo Holding, which owns 100pc of Citgo, a company whose assets include three US refineries with 750,000 b/d of total processing capacity plus associated midstream infrastructure. Citgo also has a long-term lease on an inactive refinery and storage on the Dutch Caribbean island of Aruba.

It is unclear if PdV or the government of president Nicolas Maduro has the financial resources to post a bond. Federal judges have the discretionary power to lower the bond.

An official in Venezuela's presidential palace told Argus this morning that the government will try to settle with Crystallex, in the same way that it recently settled with US independent ConocoPhillips over a separate $2bn international arbitration claim issued by the International Chamber of Commerce (ICC) for the 2007 takeover of its Venezuelan oil assets. ConocoPhillips has a separate $5bn Icsid claim that is still outstanding.

Venezuela and PdV are already in default on a combined $6.1bn of bond interest and principal payments, arrears that started to pile up late last year. The only bond that is not in default is a PdV 2020 issuance, for which PdV pledged 50.1pc of PDVH as collateral. The other 49.1pc of PDVH is pledged to Rosneft for a 2016 loan of $1.5bn. Those pledges would remain in place no matter what happens to PDVH, potentially saddling Tenor with the obligation to pay them out of any proceeds from the sale, whose value is uncertain, according to a financial sector executive who is close to the bondholders.

Rosneft said earlier this month that PdV has been making its loan payments on time. But there is significant doubt that PdV will be able to honor a $949mn principal and interest payment on its PdV 2020 due on 27 October.

The loss of Citgo would deprive PdV of a steady outlet and cash revenue stream for its oil exports, which are running at just under 1mn b/d, out of falling production currently estimated at around 1.2mn b/d, a third of the Opec country's 1990s level. At least half of the exports go to India and China, in part to service oil-backed loans. Most of the rest goes to the US, largely to Citgo.