Is it possible that a company with $48 billion in revenues can’t keep the elevators running at its corporate HQs and can’t afford enough paper and printer-ink cartridges for their offices?

If you’re PDVSA, it is!

Venezuela’s battered-and-bruised public oil company published its 2016 consolidated financial statements late at night last Friday. The data was supposed to be published by the end of July, but PDVSA requested, and was granted, an extension until August 11th. It ended up being posted with less than 90 minutes on the clock to the deadline, like some partied out undergrad staggering to deposit a paper in a professor’s mailbox minutes before it’s due.

They had no choice. Any further delay may have triggered a default under the terms of PDVSA bonds, which require that the company releases its financials each year before June 30th, with a 30-day grace period.

As for the substance, everybody knew it would be ugly the average price of Venezuela’s oil was barely over $35/barrel but we didn’t imagine it this ugly.

The biggest tell is right at the front of the doc.: the signed report at the beginning. Normally, this section is always a precise couple of pages, but in this case, we get eight pages full of KPMG’s minutely-crafted warnings, caveats and explanations. This is very far from normal, and points to the delicate negotiations that must have gone into getting Mauro Velázquez, of Rodríguez, Velázquez y Asociados (the lead auditor for this statement, and KPMG’s local partner) to sign off on this thing.

Everybody knew it would be ugly… but we didn’t imagine it this ugly.

The eight pages of caveats are like a dystopian poem written in bureaucratese. You can tell the whole story of PDVSA through those caveats, if you’re able to read them forensically. Taken as a whole, they underscore just how difficult it’s become to characterize PDVSA as a going concern, which is fancy accounting slang for a company with no imminent risk of bankruptcy.

The warnings relate to the key issues that are drowning the company: the drop in oil prices and output, the numerous corruption scandals and the multitude of ‘related-party transactions’ undertaken between PDVSA and the Venezuelan government. These issues paint a picture of internal disorder so pervasive that it puts into question whether PDVSA is keeping the government afloat or vice versa. Or even worse, whether both entities are dragging one another into a shared abyss.

Let’s start with a Golden Oldie: the staggering gasoline subsidy, which — if these Financials are to be believed — cost the central government $5.72 billion last year. But wait, how did they arrive at that number? In fact, PDVSA requested a Bs.3.8 trillion unilateral transfer to the Oil Ministry, which was subsequently approved by the country’s vice president, according to Note #29 of the statements. Where did all those freshly minted bolivars go? To the dollar black market, it seems.

Revenue was down 33.5% from $72.2 billion in 2015 to $48 billion in 2016. Net income was down a staggering 88.2% from $7.3 billion to $0.83 billion. Oil output dropped 10% to 2.57 million barrels per day, from 2.9 million in 2015.

The financials confirm several parts of the explosive Rosneft story published by Reuters on Friday, which said the Russian company had prepaid PDVSA $1.49 billion for future oil shipments in 2016, with a collateral on 49.9% of Citgo’s shares. Also, on April 2017, Rosneft again paid PDVSA $1.02 billion in advance for future oil shipments. These schemes, devised in desperation to make ends meet, could severely compromise future cash flows for the company.

It puts into question whether PDVSA is keeping the government afloat or vice versa.

Why Rosneft continues to play ball is hard to fathom. Consider Note #24, which sets out all liabilities PDVSA has incurred with Rosneft. It includes two big prepayments which came in 2014 ($2 billion each, first in May, then again in November). PDVSA missed its grace period for servicing its obligations over those deals in 2016, which forced it to start delivering unspecified quantities of crude oil and “other products” to Rosneft’s subsidiaries, further reducing its share of cash-generating exports.

As of December 31, 2016, PDVSA had exchanged $1.37 billion of its outstanding  commercial debt for promissory notes issued with a 6.5% interest rate, and a 3-year maturity. PDVSA’s plans to correr la arruga, by turning overdue debt into unmatured debt, have become business as usual for the company.

On the corruption scandals, the financials repeat the almost comical language pioneered in 2015, briefly mentioning the Roberto Rincón case, then setting out vague internal procedures to avoid and investigate corruption practices, stating that “PDVSA does not tolerate corruption” – which is true, because what they do is encourage it.

One of the most infuriating themes shown in the statements is the systematic plundering of PDVSA’s pension fund, detailed in Note # 22. The defined-benefit plan is nominally run independently from the board of directors of the company, but in reality has been used for several years now to support the payment of bonds, enriching the Bachaqueros of Wall Street at the expense of the present and future retirees from the oil industry.

The mechanics are rather simple: the pension fund is instructed to buy next-in-line PDVSA bonds and keep them to maturity, thus buying a significant share of the float every year. In the days around the payment date, PDVSA arranges with the fund to “swap” the holdings of bonds for an IOU that might as well be scribbled on a napkin, but for the purposes of the statements is a ‘short-term debt investment that does not represent any financial risk whatsoever for the pension fund’. Little by little, the vast majority of the pension fund’s assets have been subject to the scheme, leaving it holding little less than USD 100mm in assets and over $3 billion in so-called Pagarés. [Corrected: this paragraph originally misstated the currency of the $3 billion figure.]


Another caveat is the fact that the statement was prepared using two different exchange rates: the DIPRO exchange rate of 10 bolivars per USD and the Dicom exchange rate as of December 31, 2016 of 674.81 bolivars per USD. As you can imagine, the arbitrary use of such wildly different exchange rates may overestimate assets and downplay liabilities making the reported data unreliable at best. It’d take a team of talented forensic accountants an eternity to disentangle the effects of the exchange rate shenanigans.

There is just so much that’s just plain wrong with the statements. For example, they completely screwed up Note #21(b) related to last year’s swap of PDVSA 2017 for 2020 bonds, clearly misstating one of the bonds that was subject to the operation. Going through all of them is an exercise in learned depression that we cannot recommend. We will leave at here and wonder what do buyside investors think of these figures.

Not surprisingly, PDVSA is becoming toxic to international investors. Last month it tried and failed to put together an investor call. And that was before the firm’s Finance Director was sanctioned by OFAC, rendering anything he signs radioactive to all counterparts. For years, we’ve known the PDVSA roja rojita was a train-wreck in the making. Now it’s made.


      • The way I read it, sale of crude and other products = $42 B
        Other income = $6B

        (top line)

        Breakdown (#34)

        Other income is exploration rights/production (+$10B), gas to Colombia (+$4B), then loss of (-$8B in interest, other agreements) = $6B

        There is a total of $33B combined for exploration and production.+$4B gas.
        The extra $11B comes from International (+$23B less -$12B reclassifyng past events/etc.).
        That $11B seems to come from Citgo and its other assets overseas.

        Did Citgo/other refineries really make +$23B??
        That should be after those entities expenses.
        Is 40% of PDVSA’s cash now coming from Citgo instead of crude sales??

    • Regarding the discrepancy between the $ 42 B in revenues and the $ 33 B estimate value of the crude produced, the difference is caused by PDVSA’s trading activity (it buys crude and products and later resells them).

      Note 34 on page 85 shows that worldwide crude and products sales amounted to $ 42 B while worldwide crude and product purchases were $ 18 B. This results in some $ 22 B in “net” sales.

      Although the report does not show a breakdown of crude and product purchases, they most likely include non-venezuelan crude purchases by Citgo and Curacao, purchases of equity crude from PDVSA’s joint venture partners in the Faja and other production areas, product imports for the domestic market and light crude/naphthas to dilute extra heavy faja crude.

      • I disagree.

        #34 shows

        $33B Crude other products
        $4B gas
        (+$8B refined -$8B refined) = 0
        $23 International (which I first confused as gross, but it is actually net)
        -$12B Financial chicanery

        = $48B

        But, that includes ALL of Citgos and all foreign entities GROSS sales.
        Citgo is a chorizo with PDVSA, all mixed up.
        It’s bonds, and pensions are here, expensed.

        What is one f’d thing up is a line 29

        (29) Subvenciones del Estado
        Véase la política contable en la nota 38-h
        En el año 2016 PDVSA recibió una subvención del Estado por $5.726 millones (Bs.3.863.962 millones), por la
        diferencia entre el precio de venta y los costos de producci por venta de productos en Venezuela, los cuales reconoció
        como cuentas por cobrar al Accionista. Este monto incluye un reconocimiento de $3.692 millones (Bs.2.491.399
        millones) por concepto de venta de gasolina de motor de 91 y 95 octanos y $2.034 millones (Bs.1.372.563 millones)
        por venta de combustible diésel. La subvención se reconoció disminuyendo los gastos de operación del período y
        otros resultados integrales en el estado consolidado de resultados integrales del año 2016 y se presenta formando
        parte de la porción corriente de las cuentas por cobrar a partes relacionadas (véanse las notas 9, 17 y 36-p). Durante
        los años terminados el 31 de diciembre de 2015 y 2014, PDVSA no recibió subvención por este concepto.
        En el año 2015 PDVSA recibió $1.232 millones (Bs.84.712 millones) en calidad de subvención del Fondo Conjunto
        Chino – Venezolano, a través del Banco de Desarrollo Económico Social de Venezuela (BANDES), para la
        adquisición de los bienes y servicios destinados a la ejecución de proyectos petroleros, los cuales reconoció como
        ingresos diferidos formando parte de las acumulaciones y otros pasivos en el estado consolidado de situación
        financiera. Durante el año 2016, PDVSA disminuyó el gasto de depreciación en $27 millones (Bs.18.220 millones).
        Al 31 de diciembre de 2016 se incluyen en acumulaciones y otros pasivos $1.205 millones (Bs.813.146 millones) por
        concepto de estos ing

        This is saying its the state that is propping up PDVSA.
        Not PDVSA propping up the state.

        This claims profit for PDVSA is $1.6B.
        But, state subsidies to PDVSA = $5.7B

        In other words, unless Venezuela gave $5.7 to PDVSA, it would have lost $4.1B.

        Lets take that quick.
        PDVSA is given the worlds biggest puddle of oil for free.
        Pumping it out of the ground, they lost $4.1B.

        This is not because of “investment” or “costs”.
        Unless the government of Venezuela gave them $5.7 in subsidies, they lost $4B.

        Venezuela’s exports are 95% PDVSA.
        95% of positive exports last year = -(-$3.9B)
        Total net exports 2016 = -(-$3.7B)
        before imports.

        Thats unfathomable.
        You net exports are negative (before imports).

  1. Extremely useful analysis. I understand that KPMG no longer stands behind the local partner but claims it only has a loose association. I don’t know what this means in terms of legal responsibility for this company but the ghost of Enron and Arthur Andersen walks the corridors of La Campiña.
    If we only had an operative National Assembly, what wonders could be worked in anti-corruption matters!

    • Gustavo, do you really hold out any hope of a serious attack on Venezuelan corruption, when virtually EVERYBODY in any position of power/importance in Venezuelan Govt./even many private companies has “un rabo de paja”? A few notable historical examples: Betancourt’s widow going to publish a book, which was bought by CAP/AD for a few $ mill.; Pinerua’s threat, for which he was even applauded publicly in restaurants (quickly forgotten); the AN’s Guanipa/ with extensive lists/evidence (never saw the light of day), and the list goes interminably on….

  2. Chavismo is a petro-dictatorship, it stands or falls with the, not so mighty anymore, petro-dollar. It curried international favor and keeps the kennel of the Fuerzas Armadas de Ocupacion Bolivarianas.

    International support is now gone. Their dogs will soon go hungry and eat their master.

    Any dictatorship must have a modicum of efficiency, on this account Chavismo is failing miserably. As they see the precipice, they do nothing to correct course (subsidies, currency exchange controls…), as Ulamog quotes them, “Dios proveera” which shows the overwhelming irrational religious fanaticism that Chavismo encompasses. They have stated a few times that their game plan is to wait for oil prices to recover!!!

    The other miscalculation that Chavismo has done by following the Cuban model is believing that Venezuelans will settle for the dire economic reality. Just a few years ago times were really good for everyone and now, abject poverty for all. Venezuelans have tasted better than accepting a North Korean or Cuban shithole for generations.

    The military must be defeated, and it will be by Chavismo’s self imposed siege on Venezuela. In best medieval ways, disease, and hunger will do the the job to vanquish it.

    • “The military must be defeated, and it will be by Chavismo’s self imposed siege on Venezuela. In best medieval ways, disease, and hunger will do the the job to vanquish it.” Very well put!

    • The last people to go without food and other essentials will be the FANB, the GN, the paramilitaries and the enchufados. Disease and hunger will do the job to vanquish the ordinary people of Venezuela long before it touches the regime.

      You criticise the regime for having a game plan founded on waiting for oil prices to recover. And yet your own game plan seems similar. We are supposed to wait for what exactly? Until sufficient people get mad enough to launch suicide attacks against well-equipped armed forces? Well, pitchforks and torches don’t do too well against modern assault rifles. And modern history has shown that it is possible for an authoritarian regime with minority support to dominate a reluctant population for decades.

      Without outside help, human rights and democratic freedoms are now dead in Venezuela for the foreseeable future.

      • Absolutely agree with kribaez comments here.
        And that is the reason why I see US intervention as the best option.
        People have to understand that we are facing something much bigger than a polical crisis, removing Maduro wouldn’t be enough, we would need Regime change Red Aarmy and corrupt securities forces included.
        None of them will leave because street protest or international condemnation.

  3. Fantastic article, even though a financial idiot like myself can’t understand half of it.

    However, I would like to nominate the below sentence as the most brilliant example of literature ever to appear in the Internet-worldwide web-computer thingy:

    “It ended up being posted with less than 90 minutes on the clock to the deadline, like some partied out undergrad staggering to deposit a paper in a professor’s mailbox minutes before it’s due.”

  4. If this Criminal Narco-Kleptocracy stole a bit less, say by Ad/Copey corruption standards, Venezuela would be financially Ok.

  5. Its common knowledge that as most of todays Venezuelan oil production consists of extra heavy crude oil which can only be made into a commercial product by mixing it with light crude oil (which Venezuela no longer produces in enough quantities), imports of Algerian light crude have had to be made in order to mix with the heavy crude at a heavy cost to Pdvsa , more recently it is reported that Pdvsa has started substituting imports of algerian light crude for imports of US light crude. What hasnt been mentioned is that the reason for this substitution is that the blending of algerian crude with venezuelan heavy crude has proved problematic as the blend quickly turns unstable causing part of the crude to sediment to the bottom ……in short Algerian crude is unsuitable for the purpose of mixing with Venezuelan crude . In contrast experience shows that the best mix is the one obtained by blending heavy venezuelan crude with US light crude , two kinds of crudes which being highly compatible can blend most easily.

    It is ironic that Venezuelas relations with the country which is the source of the crude it needs most to continue to sell its production to the world (US crude) is the one with which has the worst relationship possible . If the US govt were to choose to ban or limit its exports of US crude and products to Venezuela (without limiting the amount of crude which it buys from Venezuela) it would cause untold problems to Pdvsa , hobbling its efforts to continue being a player in the worlds oil markets…

    Maduro should think twice before allowing its relations with the US to deteriorate further …….the consequences may be much more serious than it bargains for…

    • If the US govt were to choose to ban or limit its exports of US crude and products to Venezuela (without limiting the amount of crude which it buys from Venezuela) it would cause untold problems to Pdvsa , hobbling its efforts to continue being a player in the worlds oil markets…

      The oil and oil products that the US exports to Venezuela have a multiplier effect. That would be the way to go for sanctions. I didn’t know that about why Algerian crude isn’t used.

      In addition, Venezuela imports some gasoline from the US. More gasoline shortages would not help Maduro, though he would survive it as he has shortages of everything else.

      • Sanctions are meant to make life difficult for whoever they target , they are made to maim or hurt no necessarily to kill …..however no one can predict when problems created by sanctions can cummulatively lead to either a change in its behaviour or to a regime change , sanctions if well executed designed and targeted however do increase the chances of its target changing its behaviour or falling ……..and thats the object of the sanctions……..!!

    • I’m pretty confident that the PDVSA pensioners would much rather have their pension fund invested in US Treasury bonds than in PDVSA bonds.

      Also, unlike Social Security, the PDVSA bonds are corporate debt. Not government debt. They are in the same pickle that the employees of Enron were in when their entire retirement savings plans were invested in Enron shares. So.. not the same thing at all.

    • I’ve been advocating this for years, but Venezuelan pride will never allow money with pictures of George Washington and Thomas Jefferson.

      Let alone the words “The United States of America.”

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