PDVSA'S 2008 FINANCIAL STATEMENTS: SHINING A DIM

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000748

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E.O. 12958: DECL: 06/12/2019
TAGS: EPET EFIN VE
SUBJECT: PDVSA'S 2008 FINANCIAL STATEMENTS: SHINING A DIM
LIGHT ON A TROUBLED COMPANY

REF: A. CARACAS 564

B. 2008 CARACAS 276

Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b)
and (d).


1. (C) Summary: PDVSA's recently issued audited financial
statements for 2008 do nothing to refute the belief that
PDVSA is suffering a cash flow crisis given inefficient
management, increased political commitments, and faltering
production (ref A). Given the difficulty interpreting the
statements and important contradictions between the
statements and other numbers reported by PDVSA, however, the
statements leave analysts with as many questions as answers.
End summary.


2. (SBU) PDVSA released audited consolidated financial
statements for 2008 to its website the weekend of June 5-7.
In past years, PDVSA generally released these statements by
the end of April; one rumored reason for delay this year was
a disagreement between PDVSA and its auditors over dividends
owed to PDVSA's partners in joint ventures. As the
statements usually do not differentiate between PDVSA's
operations in Venezuela and its CITGO subsidiary in the U.S.,
it is difficult to isolate PDVSA's operations in Venezuela.


3. (SBU) Below are some of the highlights of, and questions
raised by, the auditors' 160-page report.

--Per the report, PDVSA's sales from crude and products
reached USD 125 billion. Of this amount, USD 68 billion of
sales "originated in Venezuela," presumably corresponding to
PDVSA's export and domestic sales (though it may not include
sales of crude that pass through offshore PDVSA refineries).

--The auditors say PDVSA and the Ministry of Energy and
Petroleum reported national crude production of 3.26 million
barrels per day (mbd),crude exports of 2.2 mbd, and product
exports of 0.66 mbd.

--Support for social programs and Fonden (the National
Development Fund) reached USD 2.3 and 12.4 billion
respectively, with the latter figure including the windfall
profits contribution.

--Operational costs rose 50 percent, from USD 15 billion in
2007 to USD 22.4 billion in 2008. Reasons for this dramatic
increase are unclear.

--PDVSA paid USD 23.4 billion in royalties and taxes
(excluding income tax) in 2008. In PDVSA's unaudited
financial report as of September 30, 2008, however, this same
line item was at USD 27.6 billion for the first nine months
of the year.

--Profits before income tax rose from USD 11.2 billion in
2007 to USD 13.6 billion in 2008. As the amount paid in
income tax fell from USD 5 billion to USD 4.3 billion, net
profits rose from USD 6.2 billion to USD 9.4 billion.
"Deferred" income tax payments rose from USD 1.2 billion in
2007 to USD 3.8 billion in 2008.

--Cash flow was positive, with cash increasing from USD 3.3
billion to USD 4.5 billion over the year. However, this
increase included USD 5 billion in "funds received from the
shareholder" (i.e., the government). The nature of these
funds is unclear.

--Accounts payable to providers grew from USD 3.1 billion to
USD 7.5 billion. In PDVSA's unaudited financial report as of
September 30, 2008, however, this same line item was at USD
7.8 billion (and the year-end 2007 figure was given as USD
5.6 billion, not USD 3.1 billion). Given PDVSA's failure to
make payments to the majority of service companies in the
last quarter of 2008, it is hard to believe it would have
dropped. Media reports speculate PDVSA's accounts payable
currently exceed USD 13 billion.

--Accounts receivable ("documentos y cuentas por cobrar")
dropped from USD 11.2 billion to USD 10.8 billion. In

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PDVSA's unaudited financial report as of September 30, 2008,
however, this same line item was at USD 22 billion.
Furthermore, the Central Bank's 2008 balance of payments
showed a deficit of USD 7.4 billion in the line item we
expect would contain PDVSA's accounts receivable (commercial
credits, under public sector, assets, other investment in the
capital account). Accounts receivable should include
Petrocaribe financing, which on balance we expect would have
expanded during 2008.

--Sales of food and other consumables, presumably through
PDVSA subsidiary PDVAL, reached USD 1 billion.

--Overall debt fell slightly, from USD 13.6 billion to USD
13.4 billion. PDVSA paid a USD 1.1 billion line of credit
from BNP-Paribas-led consortium in December 2008 and received
a USD 1.2 billion loan from two state banks.


4. (C) Comment: PDVSA's finances, as noted previously (ref
B) and as suggested in some of the questions and
contradictions noted above, are a black box. The auditors'
report is useful in that it gives analysts a starting point.
Some data points indicate potential cash flow problems, such
as the increase in accounts payable to providers and the USD
5 billion in "funds received" from the government. PDVSA's
inefficiency (from a business standpoint) and its increasing
focus on political priorities are suggested by the rise in
operational costs (which could also include social or
political spending) and the USD 1 billion in PDVAL sales.
The figures presented in the report suggest PDVSA's
production is less than what PDVSA says it is, as crude and
product exports of 2.8 mbd should have brought revenue of USD
89 billion at PDVSA's stated average basket price (USD 87 per
barrel),far more than the USD 68 billion mentioned above.
(Revenue of USD 68 billion at USD 87 per barrel would
indicate exports of 2.1 mbd.) In sum, the auditor's report
does not refute the financial picture we have previously
presented of PDVSA, but unfortunately the light it shines is
none too precise. Or, as post contact and blogger Miguel
Octavio put it, welcome to the Magical Mystery Tour. End
comment.
CAULFIELD