Venezuela Bonds Tumble After Oil Output Falls More Than Expected

  • Oil output falls across all regions for first time since 2008
  • PDVSA seeking to issue new debt to pay service providers

Venezuelan bonds tumbled Tuesday after IPD Latin America said the country’s oil production fell more than investors had expected.

The yield on the country’s benchmark dollar bond due in 2027 rose 48 basis points as of 2:29 p.m. in New York, the biggest increase on a closing basis in a month, to 25.1 percent. The bond’s price fell 0.88 cent to 41.07 cents on the dollar, according to data compiled by Bloomberg.

Output slid 188,000 barrels a day in the first quarter of the year to 2.59 million barrels a day, Miami-based energy consultancy IPD said in an e-mailed statement, adding that it’s the first time since 2008 that oil output has fallen across all regions in the country.

While the fact that Venezuela was facing declining production was known, the magnitude was larger than expected, Bank of America Corp. economist Francisco Rodriguez said in a research note published on Tuesday that referred to the IPD report. In a more pessimistic scenario, production could fall further and end the year at 2.1 million barrels a day, IPD said.

“They have not kept up on maintenance and it is showing everywhere: oil production, electricity problems,” Ray Zucaro, the chief investment officer at RVX Asset Management in Miami, said. “The place is falling apart. There’s no beer for god’s sake!”

The decline comes just as Venezuela needs every dollar of oil income it can get as it struggles to avoid defaulting on its foreign debt. The South American country, which relies on crude shipments for 95 percent of export revenue, is facing the worst recession in decades as declining crude prices have forced it to reduce imports.

The economy shrank 5.7 percent last year and is expected to contract 8 percent in 2016, according to the International Monetary Fund. Schlumberger Ltd. said April 12 it will reduce activity in Venezuela after failing to collect enough payments from the national oil company, Petroleos de Venezuela SA.

Factors contributing to the decline in output include drilling and well maintenance difficulties due to restriction of field services and theft, IPD said, noting that well completion now takes as long as 60 days compared to a previous average of around 15 days. Downstream operations have the potential to be more affected than upstream activities by ongoing power rationing as PDVSA, as the Caracas-based company is known, generates about 90 percent of the electricity it needs.

If IPD’s more pessimistic forecast turns out to be correct, “Venezuela would almost certainly suffer from sizable additional stress on its finances which would compromise its ability to continue servicing bondholders,” BofA’s Rodriguez wrote, adding that the country would lose almost $5 billion in revenue.

PDVSA is working on paying its service providers through debt issuance, and a first tranche reaching $2.5 billion could be sufficient to stimulate service sector activity and moderate the output decline, IPD said, adding that the company was also seeking a moratorium on some loan payments to China.

“When coupled with possible renewal of Chinese fund Tranche C for $5 billion, risk of default in 2016 falls,” IPD said.

PDVSA’s press department did not immediately respond to to questions about IPD’s production estimate or plans for debt issuance to pay service providers.

Recent rains should allow Venezuela to avoid shutting down the giant Guri hydro-electric dam in the south of the country as the reservoir is showing signs of recovery, IPD said, adding that authorities still needed to refrain from overtaxing the plant.

The government last month announced four-hour rolling blackouts for most of the country except residents of Caracas, as a drought pushed water levels at the dam to record lows. On April 26, Venezuela declared a two-day work week for government workers and said it was seeking international help to save its power grid.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE