Oil Service Firms Investments Key To Halting Venezuela's Post-Maduro Production Decline

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

Summary

Oil service firms will be the critical component in halting Venezuela oil production decline and resultant economic hemorrhaging.

For Venezuela positive cash flow through greater oil production supersedes global oil prices and OPEC agreements.

Technological advances and practices by oil service firms will enable new Venezuelan government to lower breakeven costs.

Advanced demonstration tactics and protestor demographics have pushed the Maduro-led Venezuelan government one step from the precipice.

Despite a regime change Big Oil will remain on the sidelines until a government with pro-Western and pro-business policies is established.

I believe the tipping point for regime change has been reached as a result of the advanced level and sophistication of anti-government demonstrations. Rather than a narrow socio-economic range of protestors, the increasingly violent demonstrations have morphed into a highly-coordinated, wide and deep grand coalition of all Venezuelans. This change transcends the formerly narrowly defined political party-specific approach which the Maduro government could exploit through "divide & conquer" tactics. This trend was well articulated in the Financial Times article Desperation Breeds Creativity in Venezuelan Protests dated 22 May 2017.

The demonstrations are now a de facto tag team meant to savagely grind down an already exhausted government security forces which are stretched thin, overwhelmed, just as hungry as the protestors with no support or reinforcements and at the breaking point. There are specific days for specific types of protestors ranging from women only, to students, to artists, to grandparents, etc. This tactic allows certain demographics to rest enabling sustained pressure on the same governmental security personnel who are unable to rotate out.

What has not been mentioned in the media is that the protests are so creative and well-organized utilizing military-like tactics one may strongly suspect that they are orchestrated by high-level anti-Maduro, ex-military types. Sophisticated protests at this level by civilians are unheard of unless they have high-level professional assistance.

Additionally because of Maduro's non-military background and experience, he lacks the emotional loyalty connection to the military and security forces which faithfully supported Hugo Chavez, an ex-paratrooper. In other words Maduro is not one of them which is why you can imagine how all these factors are unnerving to the Maduro government.

Of course Maduro's downfall is not inevitable. However this new level of tactics is unprecedented and is about to create that all important fissure in the elite that will force a regime change explained in detail in The New York Times article 7 May 2017 entitled Venezuela's Elites Play a High-Stakes Game for Survival.

What does this all mean for investors? Many if not all foreign oil and oil service companies in Venezuela have suffered enormously financially. Yet a post-Maduro Venezuela will need their unique and hard-to-find experience and expertise to halt oil production declines. And only a pro-Western and pro-business government can create an environment that would encourage their return to the oil business. Until that point there will be no commitment. How and how long this plays out is pure conjecture.

Certainly the new government, whether military or civilian, will need to make major terms & conditions concessions because the oil firms will have considerable leverage. New technological advances may enable oil extraction at breakeven levels or small profit given projected long-term lower global oil prices. For the government cash flow is paramount regardless of world oil prices and OPEC agreements.

This is why I stress as per my recently published SA article Opportunities with Regime Change After Venezuelan Meltdown that the immediate investor opportunities are with the oil services firms such as Baker Hughes (NYSE:BHI), Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB) and Weatherford (NYSE:WFT) because of the post-Maduro government's urgency to halt production decline and the resultant economic hemorrhaging.

The Big Oil firms like Exxon Mobil (NYSE:XOM) and Conoco Phillips (NYSE:COP) which left in 2007 and Chevron (NYSE:CVX) face a more complicated situation thus their decision and level of commitment will not be made until months, perhaps years later at the earliest, when the political situation is in their favor for negotiations.

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.