Opportunities With Regime Change After Venezuelan Meltdown

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Includes: BHGE, COP, CVX, HAL, SLB, WFT, XOM
by: Albert Goldson
Summary

Maduro’s departure will eventually provide significant investment opportunities in the return of Exxon Mobil and Conoco Phillips.

These investment opportunities extend to oil service companies still operating in Venezuela including Baker Hughes, Halliburton, Schlumberger and Weatherford.

In the ultra-short term global oil prices to get mild boost because of strife and regime change in Venezuela.

US shale oil producers as the de facto swing producers will easily fill the void by the continued Venezuelan oil production shortfall and stubbornly lingering large global oil inventory overhang.

I had originally projected a regime change in February 2016 as articulated in my SA article Venezuela: OPEC's Sacrificial Lamb for High Oil Prices but President Nicolas Maduro has proven to be more resilient than anticipated. However because of new and intensifying events the Maduro regime stands at the precipice because the citizenry is now demanding more than democracy; they're demanding food because they are literally starving.

Maduro's Administration has reached the tipping point as demonstrated by his desperate efforts, ranging from ruthless to tragic-comical, to hold onto power as follows:

  1. Internationally Maduro has increased his isolationism by ordering the exit from the Organization of American States (OAS). Per OAS rules the process takes two years and Venezuela must pay its $8.7 million debt.
  2. Domestically Maduro is proposing to change the Constitution in such a way that would postpone presidential elections.
  3. With respect to security, Maduro has authorized additional firearms for his 100,000 strong paramilitary called colectivos to supplement the National Guard and army for "crowd control", a feat which has become ever more challenging against a starving, restive and increasingly violent citizenry at all socio-economic levels. Unlike the violent demonstrations in 2014, food shortages have created an atmosphere of desperation even amongst the poor and formerly loyal chavistas.
  4. Severe cash depletion, economic kryptonite. The government and PDVSA, the national oil company, have a combined $60 billion external bond debt. The next bond payment due later in 2017 is $8.5 billion and $7.9 billion in 2018. Venezuela has about $10 billion in foreign reserves mostly in gold which is pledged as security by government for creditors. These frightening particulars can be reviewed in the 12 April 2017 NY Times article Venezuela Staves Off Default, But Low Oil Prices Pose a Threat.
  5. Specific to rapidly declining oil production, with little hard currency PDVSA is unable to purchase much needed spare parts for maintenance and the purchase of imported lighter oils required to mix with Venezuela's tar-like brand to make the final product acceptable for refining. Additionally, the brain drain of experienced managerial and operational experts as a result of the mass firings by the late president Chavez.
  6. Last but not least Maduro's incredulous propaganda efforts make the North Korean government public relations unit look like a sophisticated Madison Avenue advertising campaign which, in a Monty Python sort of way, encapsulates the impending meltdown. For example Maduro's live Facebook broadcasts gets less than 100 viewers and his Twitter account has one million less than Chavez who passed away in 2013.

What does this all mean for investors before the music stops for the Maduro regime?

This is a fortuitous time to pre-position one's investments for a post-Maduro Venezuela, which is desperate for technical expertise and spare parts to rejuvenate their oil production from which they rely heavily for revenue.

There will be an inevitable bump up in global oil prices for those investors who desire a short-term profit because of volatility and unpredictability after a regime change and the uncertainty which party will take control.

For medium and long-term investors opportunities exist with specific firms which were previously or are currently operating in Venezuela. With respect to Big Oil - Exxon Mobil (NYSE:XOM) and Conoco Phillips (NYSE:COP) which left in 2007 - may re-enter the field. Chevron (NYSE:CVX) remains a minority partner to PDVSA. Other firms which have remained despite lack of payments and reduced activity include Baker Hughes (BHI), Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB) and Weatherford (NYSE:WFT). The NY Times 20 April 2017 article entitled Amid Venezuela Protests, G.M. Plant Is Seized, and Company Exits provides several reasons why many foreign firms will either return or remain.

There are two critical components that will blunt any medium-term oil price rise to a higher range:

  1. Firstly, whether the regime change takes place before or after the May 25 OPEC meeting, even if OPEC and non-OPEC members agree to continue previously agreed upon quotas, long-term compliance was never their strong suit. Complicating this strategy is the necessary cooperation with non-OPEC Russia whose participation they rely heavily.
  2. Secondly, OPEC's best efforts continue to be offset by the independent structure and robust production of US shale oil producers.

My assessment of the three options OPEC can pursue to the political mayhem and subsequent regime change in Venezuela is as follows

  1. Extend production quotas as previously agreed that would push prices up yet risk less compliance over the long term.
  2. Agree to adjust production quotas accordingly to the estimated additional Venezuelan production shortfalls which may have little impact on current prices.
  3. Cancel earlier agreement altogether and let the market determine price range with the risk of increased US shale ramp-up depressing prices further.

Venezuela's production shortfall will give OPEC, especially those desperately needing a production quota waivers and/or to renegotiate them. Either way additional production from multiple sources will eventually push prices south once the Venezuelan situation is settled.

Disclosure: I am/we are long VDE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.