September 23 – September 29, 2016

Venezuela on the brink.

This post is number 52. A full year down and I hope that you’ve found value in the Janus Observer. Thank you for everyone that has been following this blog. More to come.

Sincerely,

J. Duff Janus

Headlines

FT – Niger Delta militants attack oil pipeline 9/24. “Attacks on oil installations have cut production by 40% this year.”
Bloomberg – OPEC Agrees to First Oil Output Cut in Eight Years 9/28. OPEC has agreed to cut production by about 750,000 barrels a day starting in November.

Briefs

David Crow of the Financial Times covered BlackBerry’s recent decision to hang up its handset business.

BlackBerry is dropping its hardware division and will focus on software and services.
“At its zenith in 2008, BlackBerry accounted for one in every five smartphones sold…”
“As sales soared, the company’s market value hit $80bn, compared with roughly $4bn today.”
Going forward the company is striking licensing deals in Indonesia to manufacture and promote its devices in the country – BlackBerry is pursuing a similar strategy in India and China.

Anjie Zheng of the Wall Street Journal highlighted how the high office rents in Hong Kong are leading some mainland Chinese companies to buy the building instead.

“At an annual $278.50 a square foot for prime office space, rental rates are on average nearly 80% higher in Hong Kong than in Manhattan, according to an annual ranking by property consultancy Knight Frank.”
“Chinese interest has pushed up Hong Kong building prices to the point that they are rarely attractive investment opportunities to other companies, said Denis Ma, head of research at Jones Lang LaSalle in Hong Kong.”
“The flurry of buying by mainland investors has pushed the yields, or the amount made on rents divided by the price of a building, down to 2.5% to 3% from 4% just four years ago, said Mr. Ma.”

Tracy Alloway of Bloomberg pointed out how something as benign as improving efficiencies resulting from standardization in the oil and gas industry has become a major factor in bringing down oil prices.

“Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020 – cutting staff, delaying projects, and squeezing contractors-they’ve continued to green-light new wells from the Norwegian Sea to Brazil, and from Uganda to the Gulf of Mexico. Those initiatives mean oil production will continue to grow, adding to the supply glut and putting downward pressure on prices.”
Bottom line: industry standardization and joint efforts in improving efficiency.
“At Statoil, the three wells drilled at its Snorre B platform cost an average 170 million kroner ($21 million) compared with about 490 million kroner for previous projects, according to the Stavanger, Norway-based company. That means oil obtained by the platform, which began pumping some 80,000 barrels a day, costs an average of $10 a barrel.”

Special Reports / Opinion Pieces

Mauldin Economics & Geopolitical Futures – Crisis & Chaos: Are We Moving Toward World War III? (Video) – George Friedman 9/26

Graphics

Visual Capitalist – UBS Global Real Estate Bubble Index – Jeff Desjardins 9/27

FT – Rhode Island cuts its hedge fund program by two-thirds – Mary Childs 9/28

Featured

*Note: bold emphasis is mine, italic sections are from the articles.

Venezuelan oil major’s debt swap: the beginning of the end? Robin Wigglesworth and Andres Schipani. Financial Times. 25 Sep. 2016.

“The head of Petroleos de Venezuela (PDVSA) last week unveiled plans to swap more than $7bn of bonds maturing next year with longer-dated debts due in 2020. To sweeten the deal for investors, PDVSA offered up its US subsidiary Citgo Petroleum as collateral.”

“S&P (the ratings agency) said it would constitute a default by PDVSA, and many analysts see the move as a curtain-raiser the move as a curtain-raiser for an inevitable restructuring of Venezuela’s national debts.”

“S&P last week lowered its grade on the affected bonds to triple-C, one of the lowest rungs possible, and said that if the swap goes through it would be considered a ‘distressed exchange’ and therefore a formal default. This would not directly affect the country’s creditworthiness, but S&P warned that a ‘sovereign default seems inevitable.'”

“PDVSA’s proposed debt swap is also complicated by the proposal to offer up to 50.1% of Citgo as security of bondholders who agree to the deal. Firstly, it is already the state oil company’s main ‘seizable’ asset in case of default; secondly, if it is fully pledged to underpin the bond swap then it would in practice deprive other bondholders of their main security.”

“Lawyers say this would therefore probably fall foul of the ‘negative pledge’ clause in PDVSA’s existing bonds. Tellingly, the 442 pages of documentation on the debt swap lists no law firms or investment banks involved.”

“If the deal collapses, then it worsens Venezuela’s predicament. Absent a deal, the country and PDVSA will jointly have to come up with some $15bn over the next 14 months for debt repayments. Although the government does not guarantee PDVSA’s debts, some lawyers say that in practice it would be hard to disentangle a full default and restructuring of the oil company from its parent, the state.”

“The country’s reserves are ‘critically low’ at $11.9bn, S&P notes, down from $16bn at the start of the year. And most of the reserves are in gold, which are hard to liquidate in a hurry without crashing prices.”
Other Interesting Articles

The Economist