Under the Radar: Unrest Creeps Into Energy-Services Sector
By Christopher Edmonds
12/20/2002 13:29
Venezuela has formally become a big headache for the Bush administration. Just as the commander-in-chief prepares to go to war against Iraq, Venezuela's unrest has the administration reconsidering its options, wondering if it can manage that crisis in addition to the one in the Middle East.
As suggested early this month , the situation in Venezuela is both fragile and flammable. That nation exports more oil to the U.S. than any other, so with a general strike closing its oil spigots, Venezuela has become the current foreign-policy hot spot. Workers are apparently willing to ignore a Venezuelan Supreme Court ruling that orders them back to work, possibly worsening the instability.
Although Venezuelan unrest could significantly impact U.S. policy, it could also affect the fortunes of energy-services companies that do business there, where the oil business has come to a grinding halt.
Anchors Down
The best indication of the current state of the Venezuelan energy industry is the tankers sitting empty, anchored outside the main ports. State-run oil company PDVSA is pumping less than 10% of its normal output, refineries are shuttered, and only dribbles of oil are making it to market.
For oil-service companies that do business in Venezuela, challenges are mounting. For example, about 4% of Baker Hughes' BHI revenue comes from Venezuela, and the company says its operations have been shuttered for all of December. Moreover, the ongoing costs of securing its operations and foreign personnel are growing.
Another energy-services firm, Weatherford WFT , notes that Venezuela accounts for about 3% of its revenue. Schlumberger SLB , Halliburton HAL and Cooper Cameron CAM also have operations in Venezuela that have been affected by the strike.
Those large global operators can weather the storm, but other companies -- while diverse in their operations -- have more at stake in Venezuela. Drilling company Pride PDE , for example, has 21 rigs in Venezuela that represent about 15% of the company's land drilling business. (Land drilling accounts for about 20% of Pride's revenue.)
Eighteen of those rigs are not working, largely as a result of political unrest. Pride says it can still collect payment under existing contracts, but it's unclear if those responsible for making the payment are willing to write the check.
Other companies, such as BJ Services BJS , Tidewater TDW and Helmerich & Payne HP , also have operations in Venezuela that will feel the pinch.
Faulting Chavez
Although the immediate impact of shuttered Venezuelan operations on fourth-quarter earnings should be limited, that doesn't mean a number of energy-services companies won't use the crisis as an opportunity to nudge earnings guidance lower. Many have already experienced weaker-than-expected results due to the slow recovery in the oil patch. For example, Precision Drilling PDS cast its numbers lower, citing weakness in Venezuela as one of the reasons.
Also, some companies may be optimistic about their chances of receiving payments for idled equipment, simply because the contracts say they will. If history is any guide, those payments will probably be subject to negotiation, if not outright rejection. Revenue collection will become more difficult as the strike lingers on. Although companies may have contractual obligations for payment, it will be very difficult to actually collect payment from a strife-ridden government.
Simply put, the longer this unrest keeps brewing, the more risk will grow -- not only for global U.S. energy policy, but also for companies that operate in the Venezuelan oil fields. |
