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Oilfield service sector takes Q4'17 hit from strife in Venezuela

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Oilfield service sector takes Q4'17 hit from strife in Venezuela

Economic turmoil and U.S. sanctions have made doing oilfield service business in Venezuela more challenging, as the OFS sector took a hit to fourth-quarter earnings from write-offs resulting from business with the country's state-run oil company, Petroleos de Venezuela SA.

Schlumberger Ltd. and Halliburton Co. released fourth-quarter and full-year 2017 earnings that outlined large losses from their respective exposures to doing business with PDVSA.

Halliburton Latin America revenue in the fourth quarter of 2017 was $615 million, up 16% sequentially, but impaired by a charge of $385 million due to a write-down on its Venezuelan assets and receivables.

"Haliburton continues to experience delays in collecting payments on receivables from our primary customer in Venezuela," CEO Jeff Miller said in the company's fourth-quarter 2017 financial filing.

The delayed payments, combined with recent credit ratings downgrades and deteriorating market conditions in Venezuela, required Halliburton to record the aggregate charge during the fourth quarter under GAAP.

"The charge represents a fair market value adjustment on its existing promissory note and a full reserve against other accounts receivables with this customer," Miller said.

Halliburton rival, the behemoth oil field services firm Schlumberger, in its Jan. 19 earnings call, reported $2.7 billion in one-off charges in the fourth quarter, including an almost $1 billion write-down of investments in Venezuela.

Given the recent economic and political developments in Venezuela, Schlumberger determined that it was appropriate to write-down its investment in the country. As a result, Schlumberger recorded a charge of $983 million, consisting of $469 million of accounts receivable, a $105 million "other than temporary impairment" charge relating to promissory notes, $285 million of fixed assets, and $78 million of other assets.

"Both companies have been writing down their exposure both in terms of net investment and receivables, some of which were converted into promissory notes," Bernstein analyst Colin Davies said in a Jan. 31 email.

"Most of the write downs in the fourth quarter of 2017 were receivables and the value of the promissory notes they took against prior receivables. It looks like the bulk of PDVSA receivables/notes is now off the balance sheets," Davies said.

Baker Hughes made no mention of Venezuela in its s Jan. 24 earnings release. The company has a much smaller footprint in Venezuela than either Schlumberger or Halliburton and has not exchanged receivables for promissory notes like its competitors.

The company's net exposure after previous write-offs is reportedly $100 million.

Strife and sanctions impede OFS opportunity

Venezuela's oil industry has been suffering for about a decade amid government corruption that extends to the PDVSA, which accounts for about 95% of Venezuela's export earnings and drives the country's economy.

Lacking sufficient investment, Venezuela's crude oil production fell nearly 13% last year, according to figures released by OPEC in early January.

Estimates of Venezuela's production vary, but the figures that the government provides to OPEC show a decline from an average of 2.37 million barrels per day in 2016 to 2.07 MMbbl/d in 2017.

"Since December 2016, the country's oil production has declined at a pace comparable to all other OPEC members combined," Barclays analyst Warren Russell said in a Jan. 31 note.

Russell said he expects production to average 1.43 MMbbl/d in 2018, a decline of nearly 700,000 bbl/d compared with figures directly reported to OPEC for 2017. In Barclays' forecast, production reaches a low point of 1.35 MMbbl/d in the second half of 2018.

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This stronger decline in production suggests that the country's deteriorating financial situation and recently imposed sanctions may be hindering the Venezuelan oil industry, Russell said.

U.S. sanctions against Venezuela were strengthened by President Donald Trump's executive order of Aug. 24, 2017, which expanded sanctions to PDVSA, and the sanctions have increased the challenges of doing business in the country.

The new sanctions prohibit all transactions related to new debt with a maturity greater than 90 days and forbid Citgo, the U.S. subsidiary of Venezuela's state-owned oil giant, from repatriating dividends in Venezuela.

These sanctions will prevent oilfield service companies from taking interest-bearing promissory notes in lieu of unpaid bills.

Backlash for PDVSA

Despite the challenging business environment indications are that oilfield service companies will continue to do business with Venezuela.

Including the Orinoco Belt, Venezuela has the largest oil reserves in the world at 301 billion barrels and very significant production of about 2 MMbbl/d, according to the BP statistical review of world energy released in June 2017.

"Despite the problems and a focus on U.S. production growth, Venezuela, although declining, is very significant on a global scale," Davies said. "Any global OFS company has to maintain some kind of presence for the long term rather than completely pull assets out of the country."

Fourth-quarter 2017 data suggest, however, that tight liquidity and sanctions are significantly hindering PDVSA's operations, which is reflected in the decline in the number of operating rigs, as well as production, Russell said.

While the bulk of the activity and contracts in Venezuela traditionally is with PDVSA, companies have curtailed activity and are restricting work to the foreign joint ventures in the country, Davies said.

"As I understand it, both companies (Schlumberger and Halliburton) are still working for the foreign oil company joint ventures and are getting paid for that work," he said.

"The biggest issue it seems is PDVSA's ability to pay in U.S. dollars. Sanctions against PDVSA executives make the problem even more difficult to manage," Davies said.

Miller said Halliburton will continue to vigorously pursue collections as it does business going forward.

But exploration and production companies may not be willing to move forward with projects in Venezuela, which would limit opportunities for oilfield service companies.

"Uncertainty about oil prices and demand growth has deterred investment in projects with long payback periods, and many of the major projects in Venezuela fall into this category," Russell said.

Without significant changes Barclays would expect E&Ps to invest in other upstream opportunities in more attractive operating environments, instead of Venezuela.