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A simple idea: The Government should take CITGO public

By Miguel Octavio | The Devil's Excrement

06.03.05 | This is something I thought about a few days ago briefly, but it was not until a conversation I had today with my brother that I realized what a good idea it may be. The Venezuela Government wants to sell CITGO (see article in today’s NYT) because it does not believe that the return on its investment is good enough and the funds would be better spent in Venezuela. Well, I think my proposal is much better: Let’s have the best of both worlds, let’s take a large part of CITGO public, while the Venezuelan Government retains control of it. In this manner, PDVSA or the Government, whichever way you want to see it, will recover its original investment plus gains during these years, but it will retain the strategic importance of CITGO in the country’s overall oil strategy.

But first some background for the uninitiated. (Some more here). In the earlier 80’s there was an oversupply of crude in the world and given that Venezuela’s crudes are sulfur rich, it was becoming more difficult to place the country’s crude. PDVSA first acquired control of CITGO and later it bought the rest of the company, as well as a couple of refineries to support the policy. When Chavez was running for President he charged that PDVSA was not getting its money’s worth and promised he would sell the company after he was elected. Despite this, all of the Chavez’ nominated President’s of both CITGO and PDVSA in the last six years, found the CITGO ownership of PDVSA to be a positive and talk of its sale had died down.

But with the new changes in PDVSA and the ascent of Bernard Mommer to the company’s Board, the idea of selling CITGO has resurfaced. Chavez in his characteristic manner, has been saying that he now learns the gas stations don’t belong to CITGO (which was known by everyone), that Venezuela is subsidizing the US and that the money would be better used here. Except the last one, the rest are simply not true.

While it is true that under current strong oil prices the internationalization strategy is no longer as critical as it was one day, it may be shortsighted to sell CITGO now, only to see prices collapse once again. (I know, everyone is predicting oil prices can’t go down, this time is different, I have heard all that before, the NASDAQ could not go down and oil could not go down in 1980 or up in 1998, but all three of these instances proved to be the same as the past, nothing goes up forever and it is never really that different)

From an economic point of view, I can’t really conclude whether owning CITGO has been good or not, from an strategic point of view it guaranteed Venezuela markets for quite a while, that otherwise may not have been available.

Thus, my suggestion is: If the Chavez administration really believes that it is not a good business, it can simply take the company public by selling let’s say 60-65% of the stock in an IPO in the NYSE (It could accompany it with a local listing too). This will allow PDVSA to retain operating control of CITGO, while the Government will be able to recoup most of the value of the company. Moreover, by doing an IPO, the Government will realize a price higher than what it would get in a sale, since by now, every oil company knows that Chavez wants to sell it and will try to underpay for it. In fact, oil stocks are right now at their historical maximum (Exxon passed General Electric this week as the most valuable company in the world).

CITGO would still be run by a Board with a majority representation from PDVSA, but it will have to add external Directors. Additionally, the company will have to clearly show that its plan for the future is to maximize shareholder value, either by distributing dividends or expanding business. If CITGO ceases to be strategically important, Venezuela could even sell its stock in the market slowly over time. The company would also have to be run with a great deal of transparency, once it becomes a public.

On the negative side, some have suggested the Government really wants to sell CITGO as a way of removing all valuable assets from the US, just in case Venezuela ever decided not to pay its external debt. This would imply this idea is of no interest to the Chavez administration. The sale will also require that the Chavez Government sound market friendly for a while in order to maximize the value of the stock at the time of the IPO.

Finally, I know that I am dreaming thinking that this may even be possible. The solution is simply too “market oriented” for the current administration, which just declared itself “socialist” last Saturday. But it clearly makes too much sense and represents a win-win situation in which the country would receive a substantial part of its investment and maximize the price of this return, while at the same time retaining control over the strategy and future of CITGO, which may become very important again for Venezuela in the near future.

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