Jul 1, 2009, 6:25 p.m. EST

Fitch Assigns a 'B+/RR4' Rating to PDVSA's USD3B Zero Coupon Notes Due 2011

NEW YORK, Jul 01, 2009 (BUSINESS WIRE) -- Fitch Ratings has assigned a 'B+/RR4' rating to Petroleos de Venezuela S.A.'s (PDVSA) proposed USD3 billion zero coupon notes due in 2011. These notes will be registered at Euroclear and/or Clearstream. Proceeds from the issuance are expected to be used to fund capital expenditures and for other general corporate purposes. Fitch also has the following ratings on PDVSA:

--Foreign currency Issuer Default Rating (IDR) 'B+';

--Local currency IDR 'B+';

--USD3 billion outstanding senior notes (due 2017) 'B+/RR4';

--USD3.5 billion outstanding senior notes (due 2027) 'B+/RR4';

--USD1.5 billion outstanding senior notes (due 2037) 'B+/RR4';

--Long-term National Scale rating of 'AAA(ven)'.

The Rating Outlook is Stable.

PDVSA's credit quality is inextricably linked to that of the government of Venezuela. It is a state-owned entity, whose royalties and tax payments represent more than 50% of the government's revenues, and it is of strategic importance to the economic and social policies of the country. In the past two years, the government has used PDVSA's balance sheet to nationalize electricity companies, as well as to acquire industrial companies. The government also took the additional step during 2008 of changing PDVSA's charter and mission statement to allow it to participate in any industry that could contribute to the social development of the country, including health care, education and agriculture.

PDVSA continues to be an important player in global energy. A strong balance sheet in line with worldwide competitors, sizeable proven hydrocarbon reserves, strategic interests in international downstream assets, private participation in upstream operations and geographic proximity to the North American market provide important competitive advantages that are difficult to undermine. PDVSA's nature as a state-owned entity, combined with increased government control over business strategies and internal resources, underscores the close link between the company's credit profile and that of the sovereign.

Venezuela's reported oil production has remained relatively stable during the past four years at approximately 3.25 million barrels per day (MMbpd) despite a high level of upstream investments. From 2002 to 2005, total capital expenditures at PDVSA averaged USD3.1 billion per year. In 2006, 2007 and 2008, they climbed to USD7.2 billion, USD12.8 billion and USD18.4 billion, respectively. Higher oil prices have also resulted in much higher contributions by PDVSA to the government in the form of royalties, taxes, dividends, and transfers to social and development funds.

During 2008, these contributions totaled approximately USD40.6 billion compared to USD43.7 billion in 2007. PDVSA's cash generation is expected to drop sharply in 2009 due to lower hydrocarbon prices. Lower cash flow may reduce investments and/or increase leverage to help the government fund capex and possible macroeconomic imbalances. Despite lower expected prices, the company's planned investments are sizeable, totaling an estimated USD121.5 billion over the next five years, of which up to USD27.7 billion may not be related to the oil and gas industry. Expropriation of multinational oil companies' investments in the heavy oil projects during 2007 by the Venezuelan government and more recently the nationalization of oil and gas service companies could make it difficult to attract the needed capital and expertise to increase production. In addition, the arbitration initiated by ExxonMobil and ConocoPhillips to recover the market value of their projects could delay private sector participation in the industry's development.

As of Dec. 31, 2008 total debt equalled US$15.1 billion. An estimated 11% or USD1.7 billion of the company's obligations were characterized as short term compared to USD4.5 billion unrestricted cash on hand. Overall, PDVSA has an attractive balance sheet, with total debt to EBITDA averaging 0.3 times (x) since 2004 and total debt to capitalization of 11%. Adjusted debt over EBITDAR is in line with worldwide competitors at 1.1x as of the end of 2008. However, PDVSA has limited access to international capital markets and its cost of capital remains vulnerable to investor concerns over the company's exposure to sovereign risk.

Liquidity is highly dependent on cash on hand and cash flow generation which turned negative at the end of 2008. In the fourth quarter last year PDVSA's EBITDA was negative USD6 billion due to a 58% decline in price of the Venezuelan oil mix, higher costs that reflect an inflation rate of about 30% while the foreign exchange rate remains fixed, and substantial subsidies in the domestic market. Fitch expects margin pressures to continue in the first half of 2009 and to be exacerbated by PDVSA's 364 Mbpd oil production cuts to comply with OPEC quotas that took effect Jan. 1, 2009. Margins should improve in the second half of the year as oil prices increase and the company reduces costs through the recently announced nationalization of oil service companies.

PDVSA is Venezuela's national oil company, with reported oil production of 3.235 MMbpd, refining capacity of 3.035 MMbpd and proved developed hydrocarbon reserves of 22.967 MMMboe as of December 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings