S&P cuts PDV America Inc ratings, may cut further

www.forbes.com Reuters, 01.14.03, 4:00 PM ET

(The following statement was released by the rating agency) NEW YORK, Jan 14 - Standard & Poor's Ratings Services today further downgraded its ratings on U.S. refining and marketing company PDV America Inc. and its indirect, wholly-owned subsidiary CITGO Petroleum Corp. The ratings remain on CreditWatch with negative implications where they were placed on Dec. 10, 2002.

Tulsa, Okla.-based PDV America has approximately $2 billion in debt and capital lease obligations outstanding.

"The ratings downgrade reflects the deterioration in PDV America's credit quality as a result of the crippling of the oil export capacity of its ultimate parent, Petroleos de Venezuela S.A. (PDVSA), the national oil company of Venezuela," said Standard & Poor's credit analyst Bruce Schwartz.

As its crude oil production has fallen from about 2.8 million barrels per day to less than 500,000 barrels per day, PDVSA has declared force majeure on crude supply arrangements with CITGO that contain margin stabilization provisions that fortify CITGO's credit quality. (CITGO purchased about half of its crude oil under these arrangements.)

The reduced volume of crude supplied under these contracts is diminishing the profitability and cash flow generation of CITGO's refineries by forcing it to refine alternate crude oils that have less attractive margins. Crude runs, to date, have not been affected at CITGO Lake Charles and Corpus Christ refineries, although runs at its Lyondell-CITGO joint venture have been cut.

In addition, the purchasing of alternate supplies is increasing working capital requirements at CITGO because the trade credit terms on open market purchases are worse than those on purchases under its crude supply agreements with PDVSA. Given the nature of the political conflict within Venezuela and the capital and lead times required for PDVSA to restore PDVSA's crude oil production, Standard & Poor's believes that crude shipments may not normalize for some time. Furthermore, CITGO's working capital requirements could increase in the interim if oil prices were to rise due to events surrounding a likely war with Iraq.

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Fixed Income in the left navigation bar, select Credit Ratings Actions.

Standard & Poor's will be hosting a seminar titled, "Determining Corporate Credit Quality in a Volatile Environment," on Feb. 2-4, 2003, at the Grand Floridian Resort & Spa, Orlando, Fla. Standard & Poor's senior analysts and invited industry leaders from the corporate, banking, and investment communities will discuss trends and current issues related to corporate credit quality.