Chevron's Venezuela Business at Risk: Will US Extend Waivers?

Zacks Equity Research

Chevron Corporation’s CVX operations in Venezuela are at the crossroads. The firm, which is the last U.S. oil major that is still operating in Venezuela, might be forced to exit the country if the Trump administration does not renew the company’s license to operate in the South-American nation. If the sanction waivers are not extended, Chevron’s exit would follow on the heels of various other U.S. companies that have bided adieu to Venezuela.

Venezuelan Oil Industry in Deep Trouble

As we know, during 2019 Venezuelan presidential crisis, Trump imposed sanctions on Venezuelan state-run oil firm, PDSVA, in a bid to push out Nicolas Maduro. As part of U.S. sanctions, American companies have been restricted to conduct business with Venezuela's PDVSA. However, the United States granted six-month waivers to Chevron, and major oilfield firms including Halliburton HAL, Schlumberger SLB, Weatherford and Baker Hughes BHGE, allowing the companies to conduct transactions with PDSVA. While the oilfield services players that received waivers have already exited the country, Chevron remains the last U.S. oil major operating in the crisis-stricken country.

Years of mismanagement, under investment and alleged government corruption have resulted in deterioration of Venezuela’s energy industry. With the country tethering on the verge of political and economic collapse, oil output has dwindled by more than 50% since 2016. In fact, Venezuela’s oil production plunged to a 30-year low prior to enforcement of the U.S. sanctions.Restrictive financial sanctions imposed by the United States on the Maduro regime and periodic power blackouts throughout the country have further strangulated the Latin American nation’s struggling energy sector. 

Chevron’s Century-Old Relationship With Venezuela in Limbo

Chevron’s Venezuelan operations date back to 1920. The company currently owns a 39% stake in a JV with PDVSA, which had produced 16,000 barrels of oil per day in the country’s Boscan Field last year. The U.S. energy giant also holds interest in three other onshore production JVs, two of which operate in Venezuela's Orinoco Belt. Notably, Chevron’s oil output from Venezuela accounted for 1% of the firm’s total global produce. During the first quarter of 2019, Chevron produced around 40,000 barrels of oil and natural gas per day, down from 44,000 barrels of oil in 2018. The company warned of the deteriorating operating environment in Venezuela, which could lead to increased business disruption and volatility in financial results.

While the Venezuelan business represents a very small portion of Chevron’s extensive global portfolio, its exit from the country would surely dent earnings. On Chevron's exit from the country, the Venezuelan government will certainly nationalize its oil assets and the firm would have to take write-downs. If the sanction waivers are lapsed and Chevron is forced to exit, the firm may find it difficult to resume its relationship with the South American nation, even if U.S.-Venezuela ties improve, amid the collapsing energy infrastructure of Venezuela.

The US supermajor wants the White House to extend the waiver, which is set to expire on Jul 27. Chevron would have to suspend the JV with PDSVA, if the waivers lapse. Further, the Venezuelan government is most likely to seize the assets if the U.S. Treasury does not extend the waiver and sanctions remain in place. 

Final Thoughts

If the waivers lapse, it would certainly trigger huge losses for Chevron, which has spent billions in the Venezuelan business. The company’s exit from the country would also make matters worse for Venezuela's energy sector, which is already on the brink of collapse under Maduro.

Notably, Venezuela — which has the largest proved oil reserves in the world — could offer substantial rewards to oil companies if Maduro leaves office. Chevron’s interest in the waiver extension signals the firm’s plans to play the long game in crisis-hit Venezuela. Even if Maduro retains power, the waiver extension would allow the firm to bet on a future payoff in a country with 303 billion barrels of proven crude reserves. On the contrary, if Maduro’s regime falls, the Zacks Rank #3 (Hold) company will gain handsomely from the country’s extensive geologic resources, provided the waivers are extended. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Halliburton Company (HAL) : Free Stock Analysis Report
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