Exxon Mobil Settlement Increases Risks For U.S. Companies In Venezuela

Includes: AVP, CL, CLX, F, PG, TM, XOM
by: Efficient Alpha

By Joseph Hogue, CFA

The Venezuelan national oil company, Petroleos de Venezuela SA, (PDSVA) has been ordered by the International Chamber of Commerce to pay Exxon Mobil (NYSE:XOM) $750 million dollars for the 2007 nationalization of the company's operations in the country. The original judgment was for $908 million but was then reduced by a counter-claim in favor of PDVSA.

While Venezuela still faces Exxon in another arbitration case for nationalization of the Cerro Negro oil project and more than a dozen other pending lawsuits from companies, the settlement is far less than the $10 billion originally sought by the American company. The settlement is also less than the $1 billion settlement offered by Venezuela earlier in the year.

The settlement amounts to a large portion (23.2%) of the company's net income for 2010, but this overlooks the significant amount of money transferred to the state. Although $750 million is not an insignificant amount of cash for the Venezuelan company, and is approximately half of the total set aside for all litigation, it only amounts to about 3 percent of the $24.6 billion total national benefit from 2010 production.

The risk to remaining companies doing business in the country is that Chavez will be emboldened ahead of next year's elections. The government has increased fiscal spending 22% over the last 12 months, after subtracting for inflation, to improve popularity among the administration's base constituency. Chavez threatened international companies last year in a state address saying, "We are going to nationalize what needs to be nationalized. The bourgeoisie hoard milk, sugar and cooking oil and then blame me. But it's their fault, the hoarders."

Chavez instituted price controls for 15,000 consumer products in November, including an immediate freeze on prices for 18 personal care items like soap and toilet paper. The move was seen as part populist politicking and partly a measure to slow the fastest inflation of any currency tracked by Bloomberg. Companies were initially given three days to register their prices with government regulators but the deadline was later extended.

The country was also ordered in November to pay $600 million to Mexican cement producer Cemex (NYSE:CX) for the 2008 nationalization of the company's operations in Venezuela.

While the loss of Venezuelan revenue would not be catastrophic for the large U.S. companies, loss of inventory and sales would amount to a significant loss to earnings per share. Colgate-Palmolive (NYSE:CL) earns approximately 5.2% of its sales from Venezuela while Clorox (NYSE:CLX) books 2.1% of revenue from within the country. Procter & Gamble (NYSE:PG) has significant revenue from Venezuela but does not disclose the percentage of total sales attributable to the country.

Avon (NYSE:AVP) reported in October that Venezuelan sales accounted for about 5 percent of revenue and 11 percent of operating profit in 2009. The country was the first in Latin America to start selling Avon products and has a sizeable corporate presence. Currency translation risks are significant for the company but risks of nationalization are lower as losses would affect the wide base of representatives in the country.

Ford (NYSE:F) and Toyota (NYSE:TM) both have sizeable revenue in the country. Ford held 15.7% of the Venezuelan market of 270,000 vehicles in 2008. General manager of Sales for Toyota in Venezuela, Ignacio Mayz, recently told El Universal that the company expects to control 20% of the market in 2012. Risks for auto makers are relatively lower than for other companies. Gas prices are heavily subsidized in the country and car ownership is relatively high compared with other countries in the region.

Disclosure: I am long AVP.