Cash-strapped Venezuela tries to leverage its ownership of Citgo

The red triangle is just about everywhere, from the massive sign looming over Fenway Park’s Green Monster to the filling stations on seemingly every other corner in the eastern half of the U.S. to the heating oil donated to the poor in the winter.

Few foreign companies have the kind of footprint or brand recognition that Citgo Holding Inc. does in much of America, and yet most people know little about it or the drama surrounding it back home in Caracas. The company is owned by Venezuela’s socialist government, and is being offered up as a lifeline to stave off a default by Petroleos de Venezuela SA.

Like the country, PDVSA, as the state-run oil giant is known, is strapped for cash. So it’s asking bondholders to swap soon-to-mature notes for longer-term securities backed by a 50.1 percent stake in its best-performing asset, Citgo. PDVSA has estimated its value at $8.3 billion, a sum scoffed at by analysts who reckon the number’s likely well less than half that.

Holders had until Thursday evening to take the offer. (There will be a second chance later with slightly worse terms.) Nothing about Citgo makes it easy to decide whether accepting would make sense. For one thing, the refiner’s ultimate fate could be clouded by billions in outstanding claims against Venezuela by Exxon Mobil Corp. and other foreign companies seeking compensation for asset seizures going back a decade.

Cash generator

“This is the first time I’ve ever encountered a situation like this,” said Hongtao Jiang, emerging markets strategist at Deutsche Bank AG. “It’s not clear to anyone whether this is 100 percent safe.”

Amid the worst crude-oil price slump in a generation, Venezuela’s economy is in free-fall, with food and medicine running short and crime exploding. Dependent on oil sales for almost half the national budget, the government is facing a dwindling cash hoard. Although PDVSA has yet to miss any interest or principal payments, investors are anxious — with the bonds yielding more than 20 percent — as Venezuela’s foreign currency reserves hover around a 13-year low of $12 billion. Four years ago, they were more than double that.

Revolutionary aspirations

But there’s a crown jewel in Citgo. Unlike producers stung by the oil collapse, companies that turn crude into fuels are enjoying the reduction in a basic business cost. “They have been making tons of money,” said Brad Bell, a credit analyst at Fitch Ratings in Chicago.

A 106-year-old outfit — it got its start in 1910 as Cities Service Co. — Citgo was a target of corporate raider T. Boone Pickens in the early 1980s before being swallowed up by Armand Hammer’s Occidental Petroleum Corp. PDVSA bought a 50 percent stake in 1986 and has had complete control since 1990, later pressing it into service to help advance the Venezuelan ruling party’s revolutionary aspirations.

Every winter since 2005, Citgo has, under orders from Caracas, supplied free or cut-rate heating oil to homeless shelters and the needy through a Boston nonprofit run by Joseph P. Kennedy II. It was a way for the late Venezuelan leader Hugo Chavez to antagonize and show up the U.S. government and then-President George W. Bush, a man Chavez liked to call “the devil.”

Protected status

Chavez’s hand-picked successor Nicolas Maduro has continued the program. During its first 10 years, annual donations averaged 23.5 million gallons, according to the Citgo-Venezuela Heating Oil Program website. Calls to the nonprofit weren’t answered. Fernando Garay, a Citgo spokesman in Houston, didn’t respond to phone messages or e-mails.

Meanwhile, in Caracas, the plan to use Citgo as collateral has raised a ruckus in Congress, as the opposition accelerates efforts to depose Maduro. PDVSA President Eulogio Del Pino was summoned to explain the debt swap amid calls for further investigation.

In the U.S., the triangular Citgo logo is well known in South Florida but may be best known in Boston. Cities Service erected a circle-shaped marketing sign featuring a shamrock atop its local office on Beacon Street in 1940, replacing it with the Citgo logo in 1965 when the brand was created. It’s of such local value — an icon visible high above the Red Sox’s home field — that the Boston Landmarks Commission is studying whether to give it protected status.

Appraising the company isn’t so easy, because its ownership means there are no public filings of financial data. And “private company valuations are traditionally and typically discounted,” said Thomas McNulty, director of the valuations and financial risk management practice at Navigant Consulting Inc.

The company, which can process about 750,000 barrels a day, saw earnings before income taxes, depreciation and amortization reach $2.4 billion last year. That’s more than double 2013’s results, according to Fitch. So, subtracting about $4 billion in debt, Citgo is probably worth $3 billion, McNulty said, basing the calculation on $1.5 billion in estimated annual Ebitda, multiplied by 4.5 — the market value-to-Ebitda multiple at which many U.S. refiners are trading.

Whichever number is right, S&P Global Ratings is no fan of the bond swap. The company downgraded PDVSA on Sept. 19 and said if the swap goes through it would be “tantamount to default” because it’s coercive toward investors. Fitch put the refiner on negative watch after PDVSA’s Sept. 16 announcement of details about the swap offer.

One issue is that Citgo labors under an “overhang” of PDVSA-related issues, Fitch’s Bell said. Senior managers from the parent are cycled in and out of U.S. offices, creating a clash of corporate cultures and management styles between Venezuelan nationals and American employees, according to employees who asked not to be identified at the company’s refinery in suburban Chicago.

In the end, Navigant’s McNulty said, PDVSA should probably just break Citgo up, sell its pieces and take the much needed cash. “If the market says it’s not going to let you do this debt exchange,” he said, “you may gradually start to hear this sort of idea trickling out.” Assuming anyone would be interested in taking on the possible legal headaches.